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
SoFi is a fantastic social lending company that provides rates as low as 2.6% variable with auto pay and 3.4% fixed with auto pay. The reason why they can offer lower rates than the rest is because they analyze you based on merit, quality of employment, and education besides just a credit score and financials. There are zero origination and prepayment fees. Offer terms are from 5, 10, 15, 20 years in both fixed and variable. Both private and public student loans can be refinanced.
Besides low rates, one of their best features is their unemployment benefits. If you lose your job while repaying your loans, you don’t have to pay your loan for up to 12 months while you look for a new job! Interest will still accrue, but having this cash flow break is a huge benefit. They also provide job assistance guidance as well. Over 500,000 users have refinanced with SoFi for an average $15,767 in lifetime savings.
Learn more and refinance or apply for a new student loan here.
Updated for 2018 and beyond