5/1/2024 – Let’s face it, the student loan industry is a scam and colleges have become extremely overpriced. Without student loans, many individuals would not have the opportunity to attend college, even if that is the best option for them. I know college is not for everyone and we should encourage more people to learn a trade and work in those industries.
However, the cost of college should not be so burdensome that people delay life milestones like buying homes and having children.
I have a simple way to solve the current student loan crisis in America without ‘canceling’ student loan debt.
Background
Currently, there are over 43 million Americans with federal student loan debt. This debt totals $1.6 trillion with a per borrower average of approximately $37,000. When someone applies for federally funded student loans, those loans begin accruing interest at high rates from the date of disbursement, rather than the date of graduation.
By the time someone graduates, they have accrued thousands of dollars in interest which puts each borrower in a worse position than where they started.
The student loan industry should not profit off the backs of Americans who wish to go to college and earn a degree that should help improve their lifetime earning potential. Students should choose their degree with care because certain professions will not provide an adequate return on their educational investment.
If our federally elected leaders cared to solved the problem, rather than send American money and resources to other countries, they would consider my proposal which I outline below.
Proposal
To reduce the financial stress associated with student loans we should eliminate the interest capitalization structure currently in place. Let me explain.
We should overhaul the current student loan system by switching to a fee based system. A fee based system could be similar to late fees associated with a lease agreement. For example, if you miss a required monthly payment, the student loan servicer would add a late fee to your account, similar to when a person misses a rent or car payment and is assessed a late fee.
The late fee could be capped at a certain percentage of your monthly payment and in theory, the the process would look like this:
- Prospective students apply for student loans (if necessary) before attending college/university
- Student is required to annually verify they are going back for another year of school (similar to current annual FAFSA application)
- Upon graduation, colleges & universities report graduate names, personal info, graduation dates, and degree to federal student loan servicer.
- The servicer sends notice of upcoming payment options and repayment timeline
- Monthly payment amounts are determined based on income and outstanding loan balance (similar to current Income Based repayment calculations already in place)
- Graduates must start making payments within 6 months of graduation unless they enroll in a master’s program or professional degree program like medical school or law school
- Each year, loan repayment amounts are recalculated based on current income (similar to recertification of income based repayment options currently available)
- Payments are applied directly to the principal loan balance each month (and any associated late fees).
- Graduates of professional schools or master’s programs would be subject to same repayment expectation outlined in steps 4-7.
Results
Switching to a fee based system has two immediate and positive results: 1) More people pay back their loans and, 2) borrowers pay back loans more quickly.
I know how disheartening it can be to pay hundreds of dollars a month only to see your balance continue to grow. I have been there and currently have over $80,000 in student loan debt that I am fighting to pay down. By no means am I advocating for loan cancellation or loan forgiveness. I plan to pay back every dollar I owe and am on the path to personally do so in the next 5 (or so) years.
However, reducing the financial burden and promoting a more sustainable loan repayment process as I have outlined will have a huge net benefit for all involved. This plan is not perfect but would be a radical shift in the industry and could lead to many more people paying off their debt rather than feeling like an indentured servant for 20+ years of their life.
Let’s hope our elected officials can come up with a reasonable plan in the near future. Lord knows our country needs America first policies.