Consolidating your student loans is a no-brainer. Interest rates have been coming down for the past 10 years while being able to pay just one payment makes things so much easier. Paying off your debt on time is the honorable thing to do. It is also up to everybody with debt to actively find solutions to reduce their interest burdens.
But what about student loan forgiveness programs?
On March 8, 2012 Congressman Hansen Clarke (D-Mich.) introduced H.R. 4170, the Student Loan Forgiveness Act of 2012. The legislation is there to counteract the over $1 trillion dollars in student loan debt students and parents now face. Student loan debt is now officially greater than total credit card debt. How crazy is that!
When you’ve got massive debt to pay, you can’t even breathe. It’s hard to save for retirement, invest in the stock market, start a family or buy a home. Given getting a college degree is fast becoming the default setting in getting a greater than minimum wage job, more people are electing to go to college than ever before.
Unfortunately, all colleges are not created equally, yet the tuition payments among private schools compared to other private schools are roughly the same. For example, why pay $48,000 to go to Boston University when you can pay $48,000 to go to Harvard, MIT, or Boston College? Clearly, the return on investment for the Harvard University student with the same grades and major is better than the student from BU. The same example can be used to compare going to the University of Michigan vs. Michigan State, or William & Mary vs. George Mason University. The formers are superior schools at the same price.
The act would create a new 10/10 Loan Repayment Plan (with new forgiveness provisions), cap interest rates for all federal loans, improve Public Service Loan Forgiveness, and convert some borrowers’ private loans to federal loans. Sounds like another great government entitlement paid for by tax payers!
Details of Student Loan Forgiveness Act
* 10/10 Loan Repayment Plan: The plan caps payment amounts at 10 percent of a borrower’s discretionary income (the same 10 percent cap as President Obama’s Pay As You Earn proposal in terms of payments) and can provide forgiveness in 10 years.
The forgiveness provision kicks in after a borrower makes 120 payments, which must be either payments under the 10/10 plan; payments that were not less than they would have been under the 10/10 plan; or “payments” of $0 during a month the borrower was in deferment due to an economic hardship.
For borrowers on or after the date of enactment, forgiveness is limited to $45,520 in principal and fees plus the interest accrued on the principal and fees. That’s $45,520 in free money! There is no forgiveness cap for borrowers who predate enactment. And because prior payments can count, many borrowers who have been repaying their loans for 10 years or more could be eligible for complete forgiveness right away.
* Refinancing Private Education Loans: Certain eligible borrowers would be able to obtain a Federal Consolidation Loan to discharge private loans. Federal loans are often woefully light to address all the costs associated with going to college. The average state school student pays around $20,000 a year now for everything, while the average private school student is expected to pay double. There’s no choice for many students but to borrow more money in private loans to account for the full cost of going to college.
* Capping Interest Rates For All Federal Loans: The act would cap the interest rate on federal loans at 3.4% and so they should given the 10-year yield is roughly at 1.65% now. Margins are generally 1-1.5%, hence federal loans should really be capped closer to 3%. Interest rates are currently set around 6.8% for all Stafford loans as of July 1, 2012, which is way too high in this low interest rate environment.
* Improving Public Service Loan Forgiveness: The act would also provide for Public Service Loan Forgiveness after 60 monthly payments instead of 120. Only having to repay your responsibly for five years instead of 10 years is huge! If I knew all I had to do was pay for five years in a row on time and get the rest of my loan forgiven to the tune of $45,520, I would NEVER miss a payment. I would even consider getting into massive six figure student loan debt and take those World Cruises they have in college for $50,000 a year knowing that I wouldn’t have to pay the money back. Afterward, I might consider going to graduate school if I couldn’t find a job of my dreams.
Should We Forgive Student Loan Debt?
In bankruptcy, your student loan debt cannot be forgiven. If you are in the state where you have bankruptcy, there’s a good chance you will struggle financially for the rest of your life as a result of these student loans. It’s easy for all of us who do not have student loan debt, or who responsibly paid off their loans in full to object to student loan debt forgiveness, however, I’d like to argue the other side to understand more.
* Protection Against Profiteering. The reason why tuition prices are soaring is because private school college administrators are jacking up rates like price gougers do during natural disasters. Administrators take advantage of economic fear and employment uncertaintly to sell students they must come to their school in order to have a future. Otherwise, they will end up on the streets. When you are a student, or a parent who may be retired or never went to college, it’s easy to fall for this type of fear mongering from private institutions. The government should step in to protect the innocent.
* Protection Against A Loss In Funding. State school funding is being hit hard by declining tax revenues due to the economic downturn. As a result, public college attendees, who often have lower median incomes than the typical private school student, are seeing even faster tuition percentage hikes. UC Berkeley, for example, has raised their tuition by over 60% in the past five years! The absolute dollar amount is still lower than comparable private schools, but 60% is 60%. The government spends our tax dollars inefficiently, so the least they can do is help subsidize our loans when all goes to hell.
* Bailouts Are Becoming The American Way. When the US government used $100 billion dollars of tax payer money to bailout Bank of America and Citibank at the height of the crisis, the public was pissed. However, if the government didn’t bailout these two institutions, millions more jobs would probably have been lost as our economic system grinded to a halt. The atrocity is when BoA and Citibank and any institution which received bailout money proceed to pay their executives millions of dollars in bonuses. That’s not right. Our “Pay Czar” failed us.
Conclusion – Be Careful With Moral Hazard
There are well over a million signatures who are for student loan forgiveness legislation. The $1 trillion tab will continue to grow to the point where I can see a complete collapse in our education system. Schools will lose money, students won’t be able to find jobs, and the productivity of our nation will decline. There will be riots on the streets as millions of students enter a negative poverty cycle if they cannot get a job and payoff their loans.
The biggest fear is not knowing when debt forgiveness will stop. What about the millions of students prior who paid off trillions more of debt responsibly. Will they start asking the government for tens of thousands of dollars in refunds as well? Once everybody knows they don’t have to pay off their loan in full after 5-10 years, what is going to stop millions of people from taking out even bigger loans and saddling the government with an even greater debt burden?
Refinance Your Student Loan With SoFi
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Updated for 2018 and beyond
My wife, who is an elementary school teacher ALMOST qualified for a student loan forgiveness program but it turns out that one of her loans was taken out in 1998 and then she consolidated her loans. While we had paid off all but $5,000 of her $20,000 in student loan debt, the consolidation made her ineligible for forgiveness. That is the problem with student loan forgiveness programs, there are too many stipulations.
I think there’s a middle ground. Making it easier to defer loans or consolidate more could help the problem, but at the same time, there should be an additional cost….not because banks need more money, but because there should be some consequence to your actions. We shouldn’t just “let them off the hook.”
I fortunately did not have any students because the military paid for me to go to college. I do not think there should be any forgiveness towards student loan debt. I do think there should be an overhaul of financial education to highschool juniors and seniors who are ultimately pushed into these loans that they don’t understand. Additionally young men and women need to have an idea of what they want to do with their lives before attending college.
For the record, I have no student loans! I took out a loan for my credential and simultaneously qualified for a grant. The grant paid off the balance after a certain time, not unlike the forgiveness program. My $11,000 credential actually only cost $2,500. If Iwould have gamed the system, I could have reduced my contribution to almost zero. I think the only way there should be forgiveness is a form of public service such as teaching, public defender or maybe a (medical) doctor in a rural area. Just doing what is expected or the responsible thing should not be rewarded.
Now that is a good compromise and a good idea! Pay for 5-10 years, and have your student loans forgiven if you are ontime 100% and dedicate at least 10 years to the public service!
Nice proposal. I like this approach as I think we shouldn’t just let anyone qualify. Our country is broke enough already. The public service aspect at least lets others benefit from the work contributions of select individuals.
I paid off all my student loans and it felt fantastic. And it’s important for graduates to learn how to be reaponsible for their own personal finances early on. If they graduate thinking they can get a handout for everything they’re going to get into a lot of trouble and cost tax payers a lot of money.
It seems like it would be too easy to game. Standard loan repayment terms for federal loans are 10 years. If you consolidate, you half your payments and turn it into 20 years. So there is nothing stopping you from consolidating with the intention of only paying half and seeking forgiveness for the other half.
Furthermore, there is no guarantee that the money was actually spent on education. One friend of mine took advantage of the lower rates and maxed out his student loans well over what he owed for the year so he could pay off his credit cards.
That said, I still owe $27,000 on my first loan and it turns 10 next year. Due to mistakes I made in the past, I actually owe more now then when I made the first payment on it. If this were to pass, there goes half of my total debt!
Edward, good point on not using the money for education. What kind of mistakes did you make to have your debt end up higher 10 years later? How dos one pay for tuition if they use their loan for other than tuition?
Out of those 10 years, three were in deferment and a fourth was when I thought I was in a deferment but in reality I just wasn’t paying my bill! That lead to a default and a $5000 fee for letting it default. Then for the past three, I was in a hardship plan and basically paying only the interest. At the end of the day, I have only made 2 1/2 years worth of payments against the principal and have 4 years worth of capitalized interested.
You still use your loans for tuition, but use the excess for whatever you want. My friend paid off high interest debt. I’ve read advice from one blogger to take any extra student loan money and invest it in the stock market.
Got it. I did not realize you could defer for so many years. I thought the most was one year, let alone three years.
Definitely do not take the advice from one blogger and use one’s student loan money to gamble in the stock markets!
The first year was the grace period, but I count that as a deferment. Then the other 2 years were supposed to be a 3 year deferment, and that’s why I wasn’t paying in the third year.
I can’t imagine gambling with borrowed money. I was amazed when I read it!
It’s a huge mess this country is heading into. But pointing fingers at one thing or another is a huge mistake for anyone going down that path. What I have come to understand over the years of trying to figure out the core of this nation’s problems is that no single issue has a clear cut definition of who’s responsible, why and what the solution is. I think of it as one giant web where everything depends on everything else. For example: we have finger pointers who say government bailouts are absolute worst and that it’s “socialist”. Then we have people who believe everything should be paid for by the government. In reality, it’s a balancing act where we have to make sacrifices in one area to gain in another. We’re in the same boat whether we like it or not.
I understand why so many people feel student debt forgiveness is a good thing, but I also realize that government spending growing out of control will send us into a spiraling nightmare. It is my deepest belief that we can balance all of our budget without a problem, right now. It’s just a matter of cutting in places some people feel uncomfortable touching – like the military budget, especially private contract spending, poor healthcare “sick care” programs, govt. incentives etc…
Ugh, I could write an essay on this… In short, yes I believe we should have student debt forgiveness programs TO A CERTAIN DEGREE with well thought out provisions, caps and restrictions. The argument that “hey, govt. is paying for it so I can borrow whatever” doesn’t fly in my opinion.
Great article and I didn’t know this bill had been proposed. That said … I am in favor of changing Student Loan rules (bankruptcy option for one), but this does not solve the problem of the cost of education. It is prohibitive to nearly everyone these days and you should not have to mortgage your future for a piece of paper, that quite frankly, does not have the same value it once did. I’m 28, almost 29, and I see how employers, especially those in the technology field look at education… it doesn’t matter. They want to know what you’ve done. In the end, this will help a lot of students, but the fundamental problem is with funding of public education becoming a private enterprise. And if it is going to be totally private, then the government needs to get out of the student loan business.
Richard,
Until a couple generations of college level educated workers pass, there will always be a bias against those without college degrees given the generations before had to go thru the process and payments.
If the govt allows student loan forgives in bankruptcy, that could launch a tidal wave of cases, 7 years of financial misery guaranteed, and plenty of abuse by future students who will have bankruptcy as their safety net.
Sam
Sam,
I don’t disagree with your point that it could create a tidal wave of people using bankruptcy as their safety net, but everything else in the financial system already does! Credit Cards. Home Loans. Etc. You can save yourself from every bad decision EXCEPT school. That seems backwards to me. There are fundamental problems in both the financial systems, and the education system and while I believe a portion of student loans should be forgivable, this isn’t the long-term education/debt solution.
-Richard
I think the theory is bc school and education is considered always a good thing.
The bad decision is not going to the right school, not picking a practical major, partying too hard while in school, and so forth. Not everybody can go to Harvard, but everybody can do decently well in school no?
I wonder how many of those with bad to no jobs and huge loans didn’t do well in school.
Perhaps an incentive program where of you get a 3.5 or better and pay your debt on time for 10 years, the rest of the principal is forgiven?
Absolutely not. I can see taking some of the other measures to keep interest rates lower or cap payments based on income, or allow for extensions, but outright forgiveness is something I would never consider a good idea. What happens to people who worked hard to pay them off on time or others who even paid them early? It would create further divide between Americans. No way.
Isn’t that what’s going on now in America? Those who worked hard are asked to pay even more taxes, even though they pay more than their share of their income already? Why not stop at taxes? Might as well go after everybody so we make everybody equal again!