Student loan repayment programs were set up by the government to help consumers battle this fast rising debt. Just as the nation is starting to improve their mortgage and credit card debts, we see college debts continue to rise at terrifying heights.
In a recently published report in NewYorkFed.org, the total student debt from 2004 to 2012 grew from $364 billion to $966 billion. Now it is more than $1 trillion. The majority of the borrowers are owed by those below the age of 40 who owe 66% of the total college debt.
Student loans have continued to plague the country in general. It is ruining the financial future of households, especially that of the young adults. Some people say that it is not really so bad because the average debt of $25,000 has a very high variation between the 39 million borrowers. 40% of them owe $10,000 or less, 30% owe $10,000 to $25,000, 3.7% owe more than $100,000, and 0.6% owing more than $200,000 in accumulated college debts.
But despite the majority owing less than $10,000, why are there a lot of student loans in deferral or delinquent? Why is the default rate of this debt continually rising when the mortgage and credit card debts are not? Obviously, consumers know what to do with their debts but the student loan problem seems to be too great for them to improve the way they handle it.
While the government is trying to help borrowers through the student loan repayment programs, you cannot help but wonder if it is really making things okay. Is it really helping or is it making things worse?
What are the different programs for student loan payments
Before we really dwell into the problem of the repayment programs, let us identify the different options that students have when it comes to paying off this debt.
According to the information found on the Student Aid website, here are the different student loan repayment programs:
Standard Repayment Plan. This allows borrowers to pay less on interest and a fixed amount of $50 or more per month. This can last up to 10 years.
Graduated Repayment Plan. Through this plan, you will end up paying more compared to the standard plan. You will start off with a lower payment that will increase every two years.
Extended Repayment Plan. This permits you to make lower contribution than the usual 10 year plan since the payment period can be stretched to 25 years. The payments can be either fixed or graduated. The qualifications will depend on the type of debt that you owe.
Income-Based Repayment Plan. This means your monthly payment will be 15% of your discretionary income. This can go as long as 25 years to pay. At the end of the 25 years, the debt can be forgiven.
Pay As You Earn Repayment Plan. This plan allows you to pay only 10% of your discretionary income. The payment plan can take up to 20 years and unpaid amounts by that time can be forgiven.
Income-Contingent Repayment Plan. Your payment will be computed based on your adjusted income, family size and your student loans. This plan can take up to 25 years to complete after which, the debt that is unpaid will be forgiven.
Income-Sensitive Repayment Plan. This computes your payment based on your annual income. As your income changes, so will your contributions. This plan will only take 10 years to complete.
Take note that any forgiven debt is usually imposed with income tax. Each of these will also require you to qualify for them. Things like your income amount and proof of financial hardship are among the requirements for some of the student loan repayment programs.
There are also other type of student loans that will have different set of payment options. You need to understand your option to determine if they will make your student loans worse or not.
3 problems with the repayment programs for college debt
Now that we understand the various options to get out of student loan debt, let us discuss why it may be making things worse. We have found 3 different reasons why the student loan repayment programs may actually be doing the problem more harm than good.
It makes students reckless with borrowing.
We need to seriously teach our children how to borrow money wisely because it is clear that they have no idea how to go about it. In most cases, students do not give much thought to borrowing because they know that there are programs that will help them come payment time. If they know that they have a safety net, it will encourage them to take the debt plunge even before they fully understand the implications of their actions. More than that, it will teach them to rely on these programs just to get themselves out of debt. If the repayment plan is not available, you can be sure that these students will be more cautious of the amount of debt that they will borrow.
It makes lenders complacent in lending.
Since the government backed repayment programs will ensure that the loaned amount will be returned, lenders are becoming too complacent in approving and issuing student loans. If the government will not back up the defaulted loans of student loan borrowers, the lenders will be forced to impose higher rates. That rate should make students think twice before they get a loan.
It puts a strain in the budget of the government – and in the end, taxpayers.
Lastly, the student loan repayment programs put a strain in the government budget. Instead of being able to put more funding in other programs, they are forced to help pay back the student loans. And who is suffering in the end? The recipients of other benefits and the taxpayers who will eventually be forced to pay more just so the government can afford to fund the programs they have set for the country.
Bottom line is, the student loan repayment programs does not deal with the real problem – irresponsible borrowing and lending. Lenders have to make sure that the repayment ability is checked thoroughly before lending. Just like in debt relief, you do not just pay for the debt, you have to understand what got you there in the first place. There are many strategies to help you stay out of debt and that is what we should be focusing on right now.
What is the best way to deal with the student loan problem?
While the student loan repayment programs are trying to help, it is not the whole solution. If you really want to demolish student loan debt, you have to understand that we need to stop the borrowing – or at least, the irresponsible borrowing. Here are some suggestions that might be worth considering.
Make sure the students understand what they are getting themselves into. When you ask a new graduate who is trying to pay off their debts for the first time, they will always complain that they wish they knew more about it before borrowing. All students have to be oriented, tested on their knowledge and asked to come up with a payment plan for the student debt. That should even be made part of the requirements before being approved of a student loan. It is important that they know what will happen if they fail to pay their debts.
Revise the process by which the lenders approve of student loans. The lender have to impose stricter processes that will help filter students who has more ability to pay back the debt. This may need to be well thought out because the borrowers do not have any credit history at the time of application. Something along the lines of the previous suggestion should do the trick.
Regulate the college fees to keep them from going up. According to CollegeData.com, a state college now costs approximately $22,000 while a private college costs $44,000. It keeps getting higher as the years go by and the government has to do something about the increases.
Set a limit on how much a student can borrow. This has to be based on the industry that the student wants to work in. For instance, if a student wishes to be a teacher who earns an average of $30,000 to $40,000, they should not be allowed to borrow up to $100,000 worth of debts. That is just crazy.
Although we have to admit that the student loan repayment programs have good intentions and have helped some borrowers, the negative effects may prove to be destructive in the long run.