Monday, June 10, 2013

Studen Loan Interest Rates

There has been a lot of writing lately about the student loan rates about to double, and how bad that is for future grads (it is a non-issue for people already out of school, since their rates are already locked in).  As much as the interest rate is a bit of a help the problem, however, is not the rate going up, but that the debt level is increasing so fast.

There are two different problems that student loans create: one is the immediate payment of a large balance means money out of pocket right when recent grads are starting new jobs and would, if debt free, be spending lots of money for new "grown-up" things, like housing and furniture.  The other is the long time payoff which means recent grads are not going to have their full income for 10+ years (and it is nearly impossible to forgive any of it). 

Lowering the interest rate kind of helps with both things as it means your payment is lower and/or your payoff term is shorter.  But lower interest rates also, according to economic theories, lead to larger loan balances, and so in the end would likely change nothing.

Three constraints would help alleviate loan debt: a cap on the percent of total income paid (say 10%), plus a cap on the total time to payoff that wasn't so long as to seem daunting: I like 5 years, but would settle for 10 with complete forgiveness of the balance remaining at that point.  The third constraint is for private loans only: they are treated like credit card debt for most legal purposes. 

Interest rates for private loans would skyrocket past credit card rates, and they would quickly become almost non-existent.  Interest rates would almost be irrelevant, as most recent grads paying at the 10% level for the time limit most often would not pay off their loans entirely. 

Pay for it by eliminating the student loan interest rate deduction (well, at least for everyone who could be expected to benefit from the program), as well as the deduction that parents get for contributing to education savings plans (which, I believe, are just another give away to well off families). 

Really, I think college should be free for anyone who wants to attend.

As for the other problem of student loan debt outstanding among current graduates?  The ability to refinance those at lower rates would be a real boon, and would make a larger difference.  It isn't ideal (some form of forgiveness or flat payments would be) but it really would help in a way that it doesn't for future grads.

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