After nearly three years of paused payments for student loans, many budgets will turn red at the end of the year. Some of this is due to consumerism and the lack of preparation, some of this is due to predatory loan practice. Either way, student loans will certainly have a negative effect on our volatile economy. Our government has essentially paused time when it comes to student loans, but have not addressed the core issues.
My situation:
I recently just paid off one of my many student loans, this one being with Sallie Mae. I am unsure if you are aware, but that interest rate was about 11.5% for a student loan. I come from a financially illiterate family and when it was time to sign the dotted line for college I did so without second-thought. (Side note: Financial education should be a primary subject in schools, why are we failing our youth.) I went to a great school, but with that came a hefty bill at the end of my term ~$100k in debt. Let’s do a little math on my debt. I owe $100,000, I can semi-comfortably pay about $1,000/mo – at 11.5% interest it will take me 27.8 years of $1,000/mo payments to pay off my $100,000 in debt. I’ll end up paying around $233,210 in interest alone.
Recently the Student Loan Forgiveness Program was signed by President Biden and is currently in court. While I will whole-heartedly accept the money to help my situation, I also recognize the burden this puts on my fellow Americans. It isn’t fair for them to pay off my debt, so I have spent time pondering a solution, and creating a plan of action to rectify the predatory practice.
Problem: Predatory Pricing
Interest rates as shown in the example above are outrageous, nobody knows when or if they will come down. These loans are risk-free for the companies funding them. These loans can not be bankrupted out of and are federally backed. This brings up the question: If the loans are risk-free, why are they returning over double the returns of the risk-free rate? The interest rates on these loans should shadow the 6-month T-bill rate, not be charging rates that outperform the stock market. Not only am I paying around 11.5% on my debt, but inflation is through the roof. Our student loan situation is a recipe for disaster.
SOLUTION: Two-pronged approach
My proposal attacks the student loan crisis in two separate flanks. The first, as outlined above, is having interest rates shadow the 6-month T-bill. The T-bill is risk-free, as are these loans that cannot be forgiven and will have wages garnished to cover the debt. Hell, people can have their social security garnished in order to pay back these loans. Interest rates need to be lowered to reflect this true risk-free rate.
The second half of my proposal on the student loan solution is something I find much more clever. HSA, 401k, IRA, FSA, these all have one thing in common, pre-tax funding. If I can use pre-tax money to park in a garage for work, why can't I use pre-tax money to pay off these predatory loans. This aspect of the solution requires the government to give a little to gain much more. Yes, the government won't receive tax dollars on the money used to pay off loans, BUT they'll increase the quality of life of borrowers leading to more money spent in the economy. The government, as well as private lenders will begin to recoup money on these loans sitting in default right now.
WHY?
Allowing an environment that encourages and assists in repayment of funds owed will bring in an influx of funds to the lenders, these dollars will then start producing again. Borrowers who are being damaged by the bad credit associated with these predatory loans will be able to recover. More money in American pockets is good for America. Let’s not straddle down our future generations in insurmountable debt.
Forgiving X amount of every person's loan will upset those who don't have loans, my approach will lessen or negate that reaction; the loans will still be repaid by the borrower rather than the community's hard-earned tax money. Consider this, nobody would lend an 18 year old $100k to start a company, but will lend the same 18 year old $100k, no questions asked, to go to school for some degree that won’t get them a job. In no way am I asking for a handout like others when it comes to student loans, I simply am asking for a common sense repayment plan and having loan rates be reasonably priced.
This brainstorm was simply to tackle current outstanding loans. That being said, something has to be done to curb the rapidly growing cost of tuition in our country.
1. Rates follow T-Bill
2. Student Loans paid back in pre-tax dollars.