More than ever, the issue of student loans is gaining attention in the United States. Approximately $1.3 trillion in student loan debt is spread out among over 43 million Americans, and factors such as wage stagnation will only continue to exacerbate the problem. However, the debt crisis can be ameliorated if the federal government takes action, specifically by pumping more money into education and capping private loans.
First, though, it is important to understand the two different types of student loans—federal and private loans—and the differences between them. Federal loans come directly from the government, and come with a number of benefits, including fixed interest rates, tax-deductible status, and income-driven repayment plans. Private loans come from lenders such as schools, banks, and credit unions, and their benefits largely depend on their source. Many private loans, unlike federal loans, require payments while the student is enrolled in school, and are often more expensive due to higher interest rates.
So why wouldn’t everyone get federal loans, if they’re so much easier? Most federal loans are need-based, which is almost entirely determined by the Free Application for Federal Student Aid (FAFSA), and many people (depending on their family’s income) may be denied federal aid even if they need it. There are many different kinds of federal loans with different interest rates and borrowers, and some are subsidized, meaning that the government will pay for your interest while you are enrolled in school. Often, though, they cannot cover all of the fees for college, making grants and scholarships very important. Private loans exist to fill any gaps that federal loans cannot cover, but since they are based on credit score, they may require a cosigner in order to be obtained.
There are also a number of payment plans for student loan debt. For both federal and private loans, full deferral allows people to put off repayment until six months after graduation. Standard and extended payment plans cover periods of 10 and 25 years respectively, over which time people pay monthly installments that gradually increase over time, intended to mimic salary increases earned by professionals. Additionally, there are payment plans that are contingent on the income levels of the borrower. These plans do not exist for private loans, however, for which the primary options involve paying off debts upon enrolling in school in order to prevent interest from accruing. All of these plans are based upon monthly repayments.
Currently, millions of Americans face thousands of dollars of debt. Some solutions to this crisis are simpler; for example, many financial aid award letters have ambiguous wording that fails to differentiate between grants and loans, and many students put off payment without knowing what that means. Interest accrues when a student chooses a full deferral plan, and many students are shocked at how much they owe upon graduation. Better disclosure could help many families weigh their options and make smarter decisions.
There are many proposals for long-term solutions that would help people who currently owe money to the government or to private lenders. Some people may qualify for loan forgiveness programs, such as the Federal Direct Loan Program. People with certain incomes may qualify to have a portion of their monthly payments forgiven if they earn below a certain threshold. Additionally, people may have their loans forgiven by working in public service. Applying for these options through the government is free, though there are many scam “Obama Student Debt Relief” organizations that charge graduates money for signing up. Don’t be fooled.
Many Congressmen—mostly Republicans—have suggested expanding private loans as a solution to the debt crisis. This perspective falls in line with the faction that decries big government and wants the federal government out of the student loan business entirely. However, this would only push people into borrowing from predatory private loan companies. The exorbitant interest rates that these companies charge force students to borrow more and more money to go to college and pay exorbitant fees for tuition and boarding. Economists warn of a student loan bubble that has been brought about by this cycle, and it would get worse if the government stayed out.
The federal government has to invest more in education in order to lower tuition, thus reducing the bubble and the amount of students in debt. Having indebted citizens is bad for the economy; borrowers who owe thousands of dollars delay purchasing a home, starting a business, or saving for their retirement. As the bubble has grown, states have slashed support for public education, which has forced colleges to raise tuition in order to make enough money. Increasing funding for education can lessen the burden on students, who are turning to student loan companies like Sallie Mae in order to pay for their education, which shouldn’t be that expensive in the first place. Additionally, the federal government should increase access to subsidized federal loans in order to decrease the extent to which people depend on private loans. Finally, the amount of money that people can borrow from private lenders should be capped at about $10,000; if anyone needs more than that, the government should be helping anyway.
We’ve dug ourselves into a deep hole; the Bush tax cuts gave us the shovels, and we started digging during the Great Recession. As tuitions rose, the hole got deeper and deeper. However, we can drop our shovels now. The hole may still exist for decades, though it will gradually get smaller as people qualify for debt forgiveness and learn more about their options. Right now, it is important that the government focus on diminishing the student loan bubble before it pops.