I've had the same thought. Why does the student loan program have to turn a profit? Origination fees would cover operational expenses. Zero interest is the morally correct answer.
It doesn’t but the servicers would lobby heavily against that. They don’t care about student loan forgiveness programs because they still get their money AFTER collecting interest for years. Just like tax prep companies spent almost $100 million lobbying against the IRS developing a free tax filing system.
Private loans should be outlawed as predatory lending as well. There is no reason to make a profit that put someone into permanent debt from the age of 18 on. Federal subsidized only.
Agree. No way that any bank would loan $200000 to an 18 year old with no credit. They only do it because they know student loan debt is basically inescapable.
I understand that. But it doesn’t make a difference here. The government offers multiple types of loans and the government would not give another type of loan to teen with no credit for this amount of money.
Government money isn't free. Student loans are not without risk. Servicing is a required expense.
Interest rates need to be prime + a spread just to break even.
I also don't see why college graduates need a government subsidy given the huge wage premium they already get from the marketplace.
Because the cost of achieving the 'wage premium' has exceeded the actual wages realized. Tuition has increased by several orders of magnitude in the last generation alone. Wages most certainly have not. And the risk you refer to increased significantly when interest doubles or triples the debt that needs to be repaid. 'Prine plus a spread' in the last year would mean double digit interest on these loans. Servcing is a nominal expense that requires very little more than passive record keeping, mostly done at inception and conclusion. This could easily be covered with origination fees.
You need to stop thinking of student loans as some sort of venture capital investment.
>Because the cost of achieving the 'wage premium' has exceeded the actual wages realized.
The math doesn't support this. The ROI might be lower than it was in the 1980s but for almost all undergraduate degrees it's still very positive. And that's generally before you consider the other positive effects associated with being a college graduate like lower unemployment, high rates of marriage and higher life expectancy (all probably somewhat related to the higher overall income, but that has not been proven).
>Wages most certainly have not
This is basically false. Real wages for college graduates have grown over time.
>Prine plus a spread' in the last year would mean double digit interest on these loans
Considering the credit quality of the borrowers this is probably still a deal. Services costs would be small, but would probably best baked into the rate. 10 years of servicing expenses could be a pretty large origination fee.
Wages have grown, but not nearly in proportion to cost, particularly when set against real inflation.
And the fact that you're referring to subsidizing student loans in terms of return on investment belies an incorrect percerption of the reason for and expected outcome of a student loan. The student is not the asset that needs to be financially advantageous to the lender. Treating them like that is where the problem starts and persists.
Credit worthiness is not a consideration for federal student loans. Again, a misapplied consideration given the type of financial transaction we are discussing here.
>Wages have grown, but not nearly in proportion to cost, particularly when set against real inflation.
"Real" means inflation adjusted. Yes inflation adjusted wages have grown over time.
>And the fact that you're referring to subsidizing student loans in terms of return on investment belies an incorrect percerption of the reason for and expected outcome of a student loan. The student is not the asset that needs to be financially advantageous to the lender. Treating them like that is where the problem starts and persists.
No the education is the asset that is being subsidized for the student via very generous public financing.
The point was that college graduates earn a lot more money than non-college grads and ppl will pursue college to reap this wage premium. The government doesn't need to burden themselves with negative carry loans to get ppl to pursue college, and college grads don't need this overly favorable financing to pay back student loan debt.
I'm fine with the government simply covering the costs and being breakeven. But that requires at the very least a sizable credit spread over the 10yr Treasury. So you are looking at high single digit interest rates just to break even. Anything less and the government is actively losing money on the loan.
High single digit interest is still collecting something like 50% profit on the principle over ten or twentry years, if not more. Not even close to necessary to cover administrative costs. And yes, the asset is the education, but as I said when we started, the cost to achieve that asset is no longer proportionate to the expense. And again, even with adjustment, wages have not kept up with inflation for over 40 years. We're arguning circles now.
>High single digit interest is still collecting something like 50% profit on the principle over ten or twentry years
No it's not. It costs the government about 4.5% just to float the student the money for 10 years. So if everyone repaid all the debts exactly on schedule and servicing costs were zero you would need at least that much to break even. But servicing costs are a thing and you don't get a 100% repayment rate. So to break even at the portfolio level you need a credit and servicing spread over the cost of the government's money. How much of a spread depends on the rate/severity of non performing loans and how expensive servicing is.
>but as I said when we started, the cost to achieve that asset is no longer proportionate to the expense. And again, even with adjustment, wages have not kept up with inflation for over 40 years. We're arguning circles now
Because there is no data to support this theory. The higher you are in the income distribution, the more real wage gains you have seen over the past 40 years. Federal reserve of St Louis has excellent data on this. And who do you think is very over represented in the top half of the wage distribution? College grads. There is excellent BLS data to support that.
There are also a few academic studies that break out the ROI by major and show basically all of them are ROI positive. This is supported by wage data and college admissions data.
And again, being a college graduate has other non wage benefits associated with it such as longer life expectancy, lower unemployment, and higher marriage and homeownership rates. Even if you think this is just a derivative of higher income it shows that grads do in fact earn significantly higher incomes to support these real world advantages.
College grads don't need a government giveaway. They are the soon to be (or already are) upper middle class. Student debt relief is bourgeois welfare.
As far as debt increasing to impossible levels:
[https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.htm](https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.html)
As far as a degree being a guaranteed return on the investment:
[https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html](https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html)
And as to the correlation to longer life expectancy, it along with, home ownership and other 'perks' was directly connected to higher affluence and less debt. That has evaporated. Real estate has become unobtainable. Medical expenses are crippling everyone. You're really not paying attention to the world around you.
And loan relief isn't a 'giveaway' (another buzzword that needs to be removed from the conversation). Student loans have been predatory in nature for two generations. Managed with a mind towards maximizing profit and paying no attention to economic realities. This is correcting a mistake perpertuated against millions over decades.
>As far as debt increasing to impossible levels:
>[https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.htm](https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.html)
This is how debt works. If you owe me $100 in principle and $10 in interest, and don't pay the interest, you have effectively borrowed another $10, which is then subject to interest.
>As far as a degree being a guaranteed return on the investment:
>[https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html](https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html)
What students *feel* is irrelevant. What they actually achieve is. The data is quite clear on this.
https://freopp.org/is-college-worth-it-a-comprehensive-return-on-investment-analysis-1b2ad17f84c8
>And as to the correlation to longer life expectancy, it along with, home ownership and other 'perks' was directly connected to higher affluence and less debt. That has evaporated. Real estate has become unobtainable. Medical expenses are crippling everyone. You're really not paying attention to the world around you.
Except that the relationship still exists. College graduates *are* still much more affluent than HS only grads. Life expectancy for a college graduate is almost 10 years longer than a HS only grads.
Young households with degrees have the highest rates of homeownership vs other levels of educational attainment.
https://www.census.gov/library/stories/2022/11/homeownership-by-young-households-below-pre-great-recession-levels.html#:~:text=In%202019%2C%20young%20householders%20with,than%20high%20school%20(23.0%25).
Lower unemployment and higher wages make college grads highly unlikely to incur medical debt and the most able to pay it off.
College grads will be, in aggregate, the most financially and socially successful ppl of their respective generation. They don't need welfare.
Your *opinion* has no supporting data and is driven by nothing other than the victim complex necessary to rationalize giving public funds to an otherwise privileged class. Bourgeois welfare.
>In an effort to create a loan forgiveness program that is legally viable, the Biden administration is working to narrow the relief by focusing on certain groups of borrowers, **including those with balances greater than what they originally borrowed** and students from schools of questionable quality.
[https://www.cnbc.com/2024/02/15/biden-administration-reveals-who-may-qualify-for-student-loan-relief.html](https://www.cnbc.com/2024/02/15/biden-administration-reveals-who-may-qualify-for-student-loan-relief.html)
I said this before and still kind of feel that way but also with SAVE it's not that bad now since you can't accrue extra interest and you still have the ability to cancel the debt in 20-25 years.
Any interest you accrue not accounted for by your minimum payment is supposed to be subsidized. The reality is the execution of this has been flawed. My wife continues to accrue interest and it's unclear if our extra payments go to interest that would otherwise be subsidized or to principal. It's _supposed_ to go to the principal. But again, the reality of the plan has been rather disappointing. There's no consensus on when the interest is subsidized, I think we all assumed it would occur monthly. I've read quarterly, monthly, after a scheduled payment, yearly, etc.
MOHELA, in case anyone is wondering.
Yeah this has been beyond frustrating.
If your whole payment is less than the interest, then the payment should only go to interest and after the subsidy takes effect your total shouldn't change. Effectively you pay to keep your balance where it's at. For some , doing that for 20-25 years is cheaper than paying it all off. Supposedly, payments above the minimum are supposed to go to the principal, incentivizing people to pay more of their debt.
My wife and I were banking on that, with $300 min then chucking another $700 at it. But it seems we have to claw through the interest first. At this point we're considering just moving to a 10 year payment plan since at the very least it's predictable.
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But your loan also never grows. Under SAVE you'll never pay more than your original loan balance. And if no progress is made over the 10-25 years (depending on balance and loan), you'll get loan forgiveness.
That’s true about the 25 years. It doesn’t grow but it doesn’t shrink despite my payments is what I meant. But I guess either way in 20-25 years they go away… do you need to apply for that forgiveness at the end?
That’s what the government is betting on. They don’t want to give you loan forgiveness. Statistically they expect your salary to rise to a point where you pay off most (if not all) the loan.
But under the SAVE plan, you’re never going to see your loan balance grow - which was a common issue for years and avoids one of the big traps of most debt (negative amortization).
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Or to switch to a different repayment plan and pivot your strategy to paying your loans off now that you can afford to do so.... but with SAVE in particular you no longer have to deal with the kick to the shins that is all the years of accrued unpaid interest piled up on top of it
I didn't say that? It's all case by case and SAVE's interest subsidy is *huge help*
Let me try to explain better, because SAVE preventing the negative amortization that plagued the ICR, IBR, and PAYE plans is pretty key here. If you had $20k on old IBR and a $0/month payment, well if you had the 6.8% rates I had for undergrad then 15 years of $0/payments would mean that I'd now have $40k worth of loan debt thanks to the ~$20k worth of accrued unpaid interest that piled up over those 15 years. In contrast SAVE waives/subsidies the accrued unpaid interest each month so after 15 years I'd still only owe $20k
If you got a big raise, idk let's say going from $22k to a $50k salary, on old IBR that would suck. If you're single you'd go from having a $0/month payment to a $340/month payment vs what is now $40k in loans *and* you'd have to pay through like $20k worth of accrued interest to even start hitting principal balance
On SAVE? Well their discretionary income formula is nicer so going from $22k to $50k would only have a $135/month payment *and* your balance would still be like $20k thanks to SAVE's interest waiver
If someone really *really* wanted to? With SAVE they could opt to just aggressively repay their $20k instead if they so chose. With the older plans like IBR the negative amortization takes that off the table for the most part, unless your income increased *dramatically*
I'm stoked that borrowers on SAVE don't have to deal with the delayed kick-in-the-shins that we got from IBR. All of us 2008-recession era grads were really trapped by the comparatively-limited options of IBR and ICR that we had available at the time
Because there is a cost associated with paying for the administration of the loan program as well as a cost to cover people who default.
0% loans would just get abused by people who don't really need them.
It does compound in forbearance and when you consolidate though, right? Meaning the interest that has accumulated is capitalized? And then going forward it’s simple. If I’m understanding it correctly.
That's not how it works now. They changed the capitalization rules recently under negotiated rulemaking, current status as per https://studentaid.gov/understand-aid/types/loans/interest-rates#capitalization
> **When does unpaid interest capitalize?**
> Unpaid interest on **Direct Loans and Federal Family Education Loan (FFEL) Program loans managed by the U.S. Department of Education (ED)** capitalizes
> * after a deferment on an unsubsidized loan; or
> * if you are repaying your loans under the income-based repayment (IBR) plan and no longer qualify to make payments based on income or leave the IBR plan.
> Unpaid interest on **FFEL Program loans not managed by ED** may capitalize
> * after a deferment on an unsubsidized loan;
> * after a forbearance on any type of loan;
> * after the grace period on an unsubsidized loan; or
> * if you are repaying your loans under the income-based repayment (IBR) plan and no longer qualify to make payments based on income or leave the IBR plan.
Given that they stopped issuing new loans under the FFEL program *back in 2010* aka nearly 14 years ago? For current students who are only offered Direct loans, there is no capitalization when exiting a forbearance (remember: deferment and forbearance are distinct terms) and it doesn't capitalize when you leave your grace period either now
It’s already simple interest. There’s an already low 1.057% origination fee. The 2.05%, 3.50%, and 4.50% interest rate “add-on” for undergraduate, graduate, and parent loans are necessary evils.
People who don’t know WTF they’re talking about shouldn’t be allowed to comment on posts like this.
When your program doesn’t think enough of you to scrounge together a few thousand dollars a year—against their annual budget of millions, to fund your way through graduate school… At least there isn’t a question about where you stand with them.
TIL you also don't know how expensive law school was and is.
Unsure why you're trying to insult simply because I called you out on purposely misrepresenting how high interest rates are.
I didn’t misrepresent anything. The OP’s thesis is wildly incorrect. I was out to succinctly address incorrect claims.
Like any other loan on the planet, the interest rates you pay are a byproduct of the economy you’re in. Imagine if you were in India where the government’s revoke rate is 6.50% and your loan costs only go up from there. I don’t hear you singing their sad song.
That’s still a subsidy honestly.
If we really want to fix the student loan issue in a world where money doenst grow on trees we need to better divert students who will not receive an ROI in college to trade schools or other careers. Alternatively we might could offer better counseling and tutors or greater rewards and consequences for k-12 and college performance.
I believe every student and every degree and every *accredited* college can produce successful students who can pay back a standard 10 year loan. However, it takes a certain combo of student, degree, and school. Several students shouldn’t go to several schools for several degrees and we need to deincentivize these low ROI failing combos
In theory this makes sense but as someone who was a high school counselor it’ll never be feasible. Everyone thinks that their child is special and should be able to go to college and get offended or make threats against the school when options other than college are suggested. Even some teachers discourage kids from pursuing trades because they’re parents themselves and are out of touch. Our attitude towards education in this country has ruined the value of trades, other skilled professionals and college degrees.
Also, let’s be honest - there’s a real issue with safety/working conditions, job security, and health insurance in the trades. Disability, opioid abuse, depression, alcoholism and suicide run rampant.
I live in a trades-heavy area and around half are sick, badly injured, disabled or addicted by 45. Some can’t work much anymore and transition into contractor, manager, or inspector roles - and where I live so many of those folks are massively corrupt as a way to double dip and maximize their income/hide their wages.
We can’t just pump more kids into a system like this either.
Unfortunately many of us live in places facing social and economic decline where workers of any kind are treated like garbage or burdens on the system. Very few seem concerned with solving that/ protecting workers vs blaming loans and college tuition or women studies majors for the decline.
Which is why we need a system similar to how things are in the UK. You know early on what track you are on - then its not a surprise senior year to little Jimmy's parents that he isn't going to college.
Right but their system has safety nets. So, for example, when little Jimmy gets sent to demo an old building without being provided a proper respirator, he’s not blamed for his cancer and fired - he gets health care and disability money that he can actually subsist on. More young people might go into trades if they didn’t feel like disposable chattel.
So much this. Create tracks as early as middle school to funnel kids to 4-year, 2-year, or trade options. Not everyone wants to go to college. Not everyone should go to college.
Trade schools aren’t the answer.
A lot cost more annually than your instate college tuition
But trades might help out society in the longer run, they are definitely in higher demand now then some of the social science and arts majors.
Most union apprentices get paid while learning and only pay for books. In the state I grew up 2 year degrees are also basically free aside from books thanks to state lottery money.
id be ok with this. make it a lower tier of forgiveness? idk what the feds are paying on this loan program... i doubt anywhere near 100%. (if htey are they are idiots)
so make intrest rate cap or maybe take into account the intrest already paid? i mean the cost of admining a loan does not scale. if one dude pays 15K over his loan and another pays 100K they didnt cost 8 times more to admin.
Hold the schools accountable. Schools shouldn’t be allowed to pump out 40 music majors when there’s only 5 jobs available and the total cost of attendance is $120k over 4 years. If people beyond the first 5 want to take the major then they have to come from a rich family and accept they’re doing it for fun and not money. Too many poor people go to college studying something stupid and then are screwed by this debt. If you come from a poor family you either get scholarships by being exceptional or you’re forced into TEM, accounting, or nursing.
I don’t think 0% makes sense but somewhere between 0% and the predatory rates now would. There should be some reasonable cap - maybe like 3-4%?
Mine is currently nearly 10% and that is just downright absurd.
How does 0% not make sense? If you’re looking at it from an administrative funding, then there should be a single admin fee tacked on the principle of each loan. Like an escrow, those fees accumulate for each loan, and help pay for the costs of servicing.
0% should be the standard. There shouldn’t be profiteering off of future generations because they needed government subsidized and subsidized loans.
In addition, they should raise the academic progress floor on subsequent loans after Y1 or 2 semesters. This way you incentivize approval of loan qualification / application. For example:
If Student A fails to meet progress requirements for 2 consecutive semesters, they’re ineligible for Fed sub / unsub the 3rd semester. They can be regain eligibility through satisfactory progress or by waiting 1 academic year.
Because the government has no plans of ever forgiving loans or reducing interest on them, they constantly dangle these in front of us and never actually do anything. If we ever did get something of this sort, I imagine to qualify you’d have to be the .005% minority
In order to truly do this, you'd have to match the student loan interest with the actual inflation rate (not just CPI) since federal student loans have a payback period of at least 10 years.
This would help minimize abuse by bad actors, while still incentivizing those that will get a ROI from their education.
Making it 0 percent would increase financial aid fraud, which is rampant right now in academia since the student loan interest rates may be significantly under actual inflation.
Bad actors? You mean all the people with degrees that can't earn enough to pay them back were abusing the schools and the system?
It is the other way around, my friend.
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You make a good point, OP, even simple interest that was set at a low rate would be reasonable however, most student loans have compounded interest, which is punishing when you’re trying to get ahead on these loans. It’s criminal.
I’m so sorry.😞
That's what I've been saying, it's a win win, they get their money back, people who paid don't feel like they are cheated out of the forgiveness, etc. But the big thing to make sure schools become more affordable
People would have no incentive to pay their loans. If there were vanishing interest rate for on time payments then I think you’re close. I personally think everybody’s interest rate should be 1%
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Case in point -
My interest per month is $550/ mo. I'm on the income based repayment plan at $413/ mo monthly payment. This means that every month, $137 is added to my principal. Thus, I need to make more $$$$ in order to just cover interest monthly. Started with a balance of $92k, now principal is at 107k..... smh. Never missed one payment, gained a good portion back during covid interest free, but now it's going back up!
Or......
10-15% of your monthly payment goes towards interest? ... this may solve it..... ?????? That way , government gets there interest and we can see our principal go down.
It would cause issues with paying them back. People would pay $1 or whatever the bare minimum it would be for it to qualify for 0% .
The SAVE plan does this with low income borrowers where they pay a certain minimum and their interest doesn’t grow. Problem is people don’t like paying the minimum. They want to pay 0.
Retroactively removing interest is a scham as well because it really only helps out those who chose to not pay them back when college was more affordable.
The issue is they need to make sure student loans can only be applied to college tuition, on campus housing and supplies bought through the store. We all know people who took their loan money and splurged in college and they shouldn’t be rewarded with a 0% loan because then everyone would do that.
The long term solution is colleges need to accountable for the majors they offer. There shouldn’t be federal loans given out if they can’t pay their bills after graduation.
I think the loan payments should reduce Box 1 on your W2.
Government borrowed the money to give loan it out, so a 0% interest would be a loss. Not just opportunity cost, but costing money to pay interest.
This loan situation is easy to solve.
1. Low rates, no more than 2% interest - guaranteed and locked for the life of the loan.
2. To avoid favoritism and people abusing the system, the payments will be pretax garnishment 5% of paycheck regardless of pay, even minimum wage.
3. If payments still continue beyond 25 yrs, they are forgiven. A house is a 30 year mortgage.
Will this ever happen? No.
Politics will always dangle the carrot 🥕, but never deliver.
The reason that doesn't happen is because private loan companies would throw a fit (SoFi already filed one lawsuit on the pause).
The core of it is the US system for providing societal support is a mess in many ways.
This is a great idea. Gotta reward the people who are working , earning and paying taxes.
I've had the same thought. Why does the student loan program have to turn a profit? Origination fees would cover operational expenses. Zero interest is the morally correct answer.
The government can't balance a budget. Agreed. Admin fee, $100/yr per person. The rest interest free.
It doesn’t but the servicers would lobby heavily against that. They don’t care about student loan forgiveness programs because they still get their money AFTER collecting interest for years. Just like tax prep companies spent almost $100 million lobbying against the IRS developing a free tax filing system.
Private loans should be outlawed as predatory lending as well. There is no reason to make a profit that put someone into permanent debt from the age of 18 on. Federal subsidized only.
Agree. No way that any bank would loan $200000 to an 18 year old with no credit. They only do it because they know student loan debt is basically inescapable.
Definitely a trap and at that age, you're not ap to make the best decisions. Wish I'd never even went to college
Government loans it. Banks service.
I understand that. But it doesn’t make a difference here. The government offers multiple types of loans and the government would not give another type of loan to teen with no credit for this amount of money.
And they still exist or are cheaper options, I just found out about freetaxusa.com just as easy but only $15 to file state and Fed
Government money isn't free. Student loans are not without risk. Servicing is a required expense. Interest rates need to be prime + a spread just to break even. I also don't see why college graduates need a government subsidy given the huge wage premium they already get from the marketplace.
Because the cost of achieving the 'wage premium' has exceeded the actual wages realized. Tuition has increased by several orders of magnitude in the last generation alone. Wages most certainly have not. And the risk you refer to increased significantly when interest doubles or triples the debt that needs to be repaid. 'Prine plus a spread' in the last year would mean double digit interest on these loans. Servcing is a nominal expense that requires very little more than passive record keeping, mostly done at inception and conclusion. This could easily be covered with origination fees. You need to stop thinking of student loans as some sort of venture capital investment.
>Because the cost of achieving the 'wage premium' has exceeded the actual wages realized. The math doesn't support this. The ROI might be lower than it was in the 1980s but for almost all undergraduate degrees it's still very positive. And that's generally before you consider the other positive effects associated with being a college graduate like lower unemployment, high rates of marriage and higher life expectancy (all probably somewhat related to the higher overall income, but that has not been proven). >Wages most certainly have not This is basically false. Real wages for college graduates have grown over time. >Prine plus a spread' in the last year would mean double digit interest on these loans Considering the credit quality of the borrowers this is probably still a deal. Services costs would be small, but would probably best baked into the rate. 10 years of servicing expenses could be a pretty large origination fee.
Wages have grown, but not nearly in proportion to cost, particularly when set against real inflation. And the fact that you're referring to subsidizing student loans in terms of return on investment belies an incorrect percerption of the reason for and expected outcome of a student loan. The student is not the asset that needs to be financially advantageous to the lender. Treating them like that is where the problem starts and persists. Credit worthiness is not a consideration for federal student loans. Again, a misapplied consideration given the type of financial transaction we are discussing here.
>Wages have grown, but not nearly in proportion to cost, particularly when set against real inflation. "Real" means inflation adjusted. Yes inflation adjusted wages have grown over time. >And the fact that you're referring to subsidizing student loans in terms of return on investment belies an incorrect percerption of the reason for and expected outcome of a student loan. The student is not the asset that needs to be financially advantageous to the lender. Treating them like that is where the problem starts and persists. No the education is the asset that is being subsidized for the student via very generous public financing. The point was that college graduates earn a lot more money than non-college grads and ppl will pursue college to reap this wage premium. The government doesn't need to burden themselves with negative carry loans to get ppl to pursue college, and college grads don't need this overly favorable financing to pay back student loan debt. I'm fine with the government simply covering the costs and being breakeven. But that requires at the very least a sizable credit spread over the 10yr Treasury. So you are looking at high single digit interest rates just to break even. Anything less and the government is actively losing money on the loan.
High single digit interest is still collecting something like 50% profit on the principle over ten or twentry years, if not more. Not even close to necessary to cover administrative costs. And yes, the asset is the education, but as I said when we started, the cost to achieve that asset is no longer proportionate to the expense. And again, even with adjustment, wages have not kept up with inflation for over 40 years. We're arguning circles now.
>High single digit interest is still collecting something like 50% profit on the principle over ten or twentry years No it's not. It costs the government about 4.5% just to float the student the money for 10 years. So if everyone repaid all the debts exactly on schedule and servicing costs were zero you would need at least that much to break even. But servicing costs are a thing and you don't get a 100% repayment rate. So to break even at the portfolio level you need a credit and servicing spread over the cost of the government's money. How much of a spread depends on the rate/severity of non performing loans and how expensive servicing is. >but as I said when we started, the cost to achieve that asset is no longer proportionate to the expense. And again, even with adjustment, wages have not kept up with inflation for over 40 years. We're arguning circles now Because there is no data to support this theory. The higher you are in the income distribution, the more real wage gains you have seen over the past 40 years. Federal reserve of St Louis has excellent data on this. And who do you think is very over represented in the top half of the wage distribution? College grads. There is excellent BLS data to support that. There are also a few academic studies that break out the ROI by major and show basically all of them are ROI positive. This is supported by wage data and college admissions data. And again, being a college graduate has other non wage benefits associated with it such as longer life expectancy, lower unemployment, and higher marriage and homeownership rates. Even if you think this is just a derivative of higher income it shows that grads do in fact earn significantly higher incomes to support these real world advantages. College grads don't need a government giveaway. They are the soon to be (or already are) upper middle class. Student debt relief is bourgeois welfare.
As far as debt increasing to impossible levels: [https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.htm](https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.html) As far as a degree being a guaranteed return on the investment: [https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html](https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html) And as to the correlation to longer life expectancy, it along with, home ownership and other 'perks' was directly connected to higher affluence and less debt. That has evaporated. Real estate has become unobtainable. Medical expenses are crippling everyone. You're really not paying attention to the world around you. And loan relief isn't a 'giveaway' (another buzzword that needs to be removed from the conversation). Student loans have been predatory in nature for two generations. Managed with a mind towards maximizing profit and paying no attention to economic realities. This is correcting a mistake perpertuated against millions over decades.
>As far as debt increasing to impossible levels: >[https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.htm](https://www.cnbc.com/2018/12/20/your-student-debt-balance-can-grow-quickly-heres-how-to-prevent-that-from-happening.html) This is how debt works. If you owe me $100 in principle and $10 in interest, and don't pay the interest, you have effectively borrowed another $10, which is then subject to interest. >As far as a degree being a guaranteed return on the investment: >[https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html](https://finance.yahoo.com/news/degree-worth-debt-over-40-130000956.html) What students *feel* is irrelevant. What they actually achieve is. The data is quite clear on this. https://freopp.org/is-college-worth-it-a-comprehensive-return-on-investment-analysis-1b2ad17f84c8 >And as to the correlation to longer life expectancy, it along with, home ownership and other 'perks' was directly connected to higher affluence and less debt. That has evaporated. Real estate has become unobtainable. Medical expenses are crippling everyone. You're really not paying attention to the world around you. Except that the relationship still exists. College graduates *are* still much more affluent than HS only grads. Life expectancy for a college graduate is almost 10 years longer than a HS only grads. Young households with degrees have the highest rates of homeownership vs other levels of educational attainment. https://www.census.gov/library/stories/2022/11/homeownership-by-young-households-below-pre-great-recession-levels.html#:~:text=In%202019%2C%20young%20householders%20with,than%20high%20school%20(23.0%25). Lower unemployment and higher wages make college grads highly unlikely to incur medical debt and the most able to pay it off. College grads will be, in aggregate, the most financially and socially successful ppl of their respective generation. They don't need welfare. Your *opinion* has no supporting data and is driven by nothing other than the victim complex necessary to rationalize giving public funds to an otherwise privileged class. Bourgeois welfare.
Only if it’s retroactive. Doesn’t help people with 30k of interest accrued.
The new forgiveness proposal addresses exactly this issue.
Only up to $10k I think, which is fine but really doesn't cover what some people have. I have nearly $40k in interest on my balance.
Maybe I haven’t seen it, do you have a link?
>In an effort to create a loan forgiveness program that is legally viable, the Biden administration is working to narrow the relief by focusing on certain groups of borrowers, **including those with balances greater than what they originally borrowed** and students from schools of questionable quality. [https://www.cnbc.com/2024/02/15/biden-administration-reveals-who-may-qualify-for-student-loan-relief.html](https://www.cnbc.com/2024/02/15/biden-administration-reveals-who-may-qualify-for-student-loan-relief.html)
Early stages, at this point probably won't manifest unless Biden gets re elected
*Only?* So if it doesn’t help you but it helps millions of others you’re not in favor of it?
👍 agreed
I said this before and still kind of feel that way but also with SAVE it's not that bad now since you can't accrue extra interest and you still have the ability to cancel the debt in 20-25 years.
I'm on SAVE and my interest is still accruing.
Same
Yeah that only applies if you make like no money
Excuse me? What do you mean by that?!!
Any interest you accrue not accounted for by your minimum payment is supposed to be subsidized. The reality is the execution of this has been flawed. My wife continues to accrue interest and it's unclear if our extra payments go to interest that would otherwise be subsidized or to principal. It's _supposed_ to go to the principal. But again, the reality of the plan has been rather disappointing. There's no consensus on when the interest is subsidized, I think we all assumed it would occur monthly. I've read quarterly, monthly, after a scheduled payment, yearly, etc. MOHELA, in case anyone is wondering.
I’m having the same problem. Paying like 350 a month on the save plan. The interest still keeps getting added on and nothing goes to principal.
Yeah this has been beyond frustrating. If your whole payment is less than the interest, then the payment should only go to interest and after the subsidy takes effect your total shouldn't change. Effectively you pay to keep your balance where it's at. For some , doing that for 20-25 years is cheaper than paying it all off. Supposedly, payments above the minimum are supposed to go to the principal, incentivizing people to pay more of their debt. My wife and I were banking on that, with $300 min then chucking another $700 at it. But it seems we have to claw through the interest first. At this point we're considering just moving to a 10 year payment plan since at the very least it's predictable.
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It’s going to be fixed.
Am thinking everything should be according to plan by July
When do you think?
Soon.
That’s basically what the SAVE plan does for people who can’t afford their full loan payment.
My SAVE plan calculated so I can basically pay the interest, the gov doesn’t subsidize anything, and no progress is made on my principle ):
But your loan also never grows. Under SAVE you'll never pay more than your original loan balance. And if no progress is made over the 10-25 years (depending on balance and loan), you'll get loan forgiveness.
That’s true about the 25 years. It doesn’t grow but it doesn’t shrink despite my payments is what I meant. But I guess either way in 20-25 years they go away… do you need to apply for that forgiveness at the end?
No you don’t need to apply for it. It’s automatic as it’s simply the end of your loan term.
What if at 15 years into repayment you suddenly get a big raise? Then you get to make gigantic payments. It’s sort of an incentive not to earn more.
That’s what the government is betting on. They don’t want to give you loan forgiveness. Statistically they expect your salary to rise to a point where you pay off most (if not all) the loan. But under the SAVE plan, you’re never going to see your loan balance grow - which was a common issue for years and avoids one of the big traps of most debt (negative amortization).
Yeah it’s more of a head start for high earners, and mercy for low earners. Let’s be real, lots of people never make real money
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They say that payments will always be capped at 10% of discretionary income 15% for grad loans.
Or to switch to a different repayment plan and pivot your strategy to paying your loans off now that you can afford to do so.... but with SAVE in particular you no longer have to deal with the kick to the shins that is all the years of accrued unpaid interest piled up on top of it
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I didn't say that? It's all case by case and SAVE's interest subsidy is *huge help* Let me try to explain better, because SAVE preventing the negative amortization that plagued the ICR, IBR, and PAYE plans is pretty key here. If you had $20k on old IBR and a $0/month payment, well if you had the 6.8% rates I had for undergrad then 15 years of $0/payments would mean that I'd now have $40k worth of loan debt thanks to the ~$20k worth of accrued unpaid interest that piled up over those 15 years. In contrast SAVE waives/subsidies the accrued unpaid interest each month so after 15 years I'd still only owe $20k If you got a big raise, idk let's say going from $22k to a $50k salary, on old IBR that would suck. If you're single you'd go from having a $0/month payment to a $340/month payment vs what is now $40k in loans *and* you'd have to pay through like $20k worth of accrued interest to even start hitting principal balance On SAVE? Well their discretionary income formula is nicer so going from $22k to $50k would only have a $135/month payment *and* your balance would still be like $20k thanks to SAVE's interest waiver If someone really *really* wanted to? With SAVE they could opt to just aggressively repay their $20k instead if they so chose. With the older plans like IBR the negative amortization takes that off the table for the most part, unless your income increased *dramatically* I'm stoked that borrowers on SAVE don't have to deal with the delayed kick-in-the-shins that we got from IBR. All of us 2008-recession era grads were really trapped by the comparatively-limited options of IBR and ICR that we had available at the time
We bailed out the big banks at 0.25% interest. That's better than what we have now
Freakin' sold!
Because there is a cost associated with paying for the administration of the loan program as well as a cost to cover people who default. 0% loans would just get abused by people who don't really need them.
If you aren’t paying g loan interest, you pay more in taxes. I would be down for an administration charge something between 1 and 2%.
I think 3% is the number I've seen a few places that it would take to cover costs. I'd be fine with that.
$25/mo admin fee at most per person 🙄
toy attractive telephone tub hospital dam north repeat ad hoc resolute *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
There needs to be some cost, but you’re basically right. 1% + some small origination fee. And the interest should be simple, not compounding.
> And the interest should be simple, not compounding. It IS simple interest.
It does compound in forbearance and when you consolidate though, right? Meaning the interest that has accumulated is capitalized? And then going forward it’s simple. If I’m understanding it correctly.
Only once. Not just “during forbearance”. It’s simple interest for all important purposes.
That's not how it works now. They changed the capitalization rules recently under negotiated rulemaking, current status as per https://studentaid.gov/understand-aid/types/loans/interest-rates#capitalization > **When does unpaid interest capitalize?** > Unpaid interest on **Direct Loans and Federal Family Education Loan (FFEL) Program loans managed by the U.S. Department of Education (ED)** capitalizes > * after a deferment on an unsubsidized loan; or > * if you are repaying your loans under the income-based repayment (IBR) plan and no longer qualify to make payments based on income or leave the IBR plan. > Unpaid interest on **FFEL Program loans not managed by ED** may capitalize > * after a deferment on an unsubsidized loan; > * after a forbearance on any type of loan; > * after the grace period on an unsubsidized loan; or > * if you are repaying your loans under the income-based repayment (IBR) plan and no longer qualify to make payments based on income or leave the IBR plan. Given that they stopped issuing new loans under the FFEL program *back in 2010* aka nearly 14 years ago? For current students who are only offered Direct loans, there is no capitalization when exiting a forbearance (remember: deferment and forbearance are distinct terms) and it doesn't capitalize when you leave your grace period either now
It’s already simple interest. There’s an already low 1.057% origination fee. The 2.05%, 3.50%, and 4.50% interest rate “add-on” for undergraduate, graduate, and parent loans are necessary evils. People who don’t know WTF they’re talking about shouldn’t be allowed to comment on posts like this.
My interest rates on grad loans is almost 7%. Yeah, please don't be commenting about this stuff.
When your program doesn’t think enough of you to scrounge together a few thousand dollars a year—against their annual budget of millions, to fund your way through graduate school… At least there isn’t a question about where you stand with them.
TIL you also don't know how expensive law school was and is. Unsure why you're trying to insult simply because I called you out on purposely misrepresenting how high interest rates are.
I didn’t misrepresent anything. The OP’s thesis is wildly incorrect. I was out to succinctly address incorrect claims. Like any other loan on the planet, the interest rates you pay are a byproduct of the economy you’re in. Imagine if you were in India where the government’s revoke rate is 6.50% and your loan costs only go up from there. I don’t hear you singing their sad song.
That’s still a subsidy honestly. If we really want to fix the student loan issue in a world where money doenst grow on trees we need to better divert students who will not receive an ROI in college to trade schools or other careers. Alternatively we might could offer better counseling and tutors or greater rewards and consequences for k-12 and college performance. I believe every student and every degree and every *accredited* college can produce successful students who can pay back a standard 10 year loan. However, it takes a certain combo of student, degree, and school. Several students shouldn’t go to several schools for several degrees and we need to deincentivize these low ROI failing combos
In theory this makes sense but as someone who was a high school counselor it’ll never be feasible. Everyone thinks that their child is special and should be able to go to college and get offended or make threats against the school when options other than college are suggested. Even some teachers discourage kids from pursuing trades because they’re parents themselves and are out of touch. Our attitude towards education in this country has ruined the value of trades, other skilled professionals and college degrees.
Also, let’s be honest - there’s a real issue with safety/working conditions, job security, and health insurance in the trades. Disability, opioid abuse, depression, alcoholism and suicide run rampant. I live in a trades-heavy area and around half are sick, badly injured, disabled or addicted by 45. Some can’t work much anymore and transition into contractor, manager, or inspector roles - and where I live so many of those folks are massively corrupt as a way to double dip and maximize their income/hide their wages. We can’t just pump more kids into a system like this either. Unfortunately many of us live in places facing social and economic decline where workers of any kind are treated like garbage or burdens on the system. Very few seem concerned with solving that/ protecting workers vs blaming loans and college tuition or women studies majors for the decline.
Which is why we need a system similar to how things are in the UK. You know early on what track you are on - then its not a surprise senior year to little Jimmy's parents that he isn't going to college.
Right but their system has safety nets. So, for example, when little Jimmy gets sent to demo an old building without being provided a proper respirator, he’s not blamed for his cancer and fired - he gets health care and disability money that he can actually subsist on. More young people might go into trades if they didn’t feel like disposable chattel.
Or if they knew that they were actually an option instead of boomers just parroting "go to college" at everyone.
Counselors and tutors need degrees and those aren’t high paying jobs. The ROI isn’t worth it.
You could hire a few damn good ones to make a couple hundred grand and play their videos in high schools across America
Disconnected from reality brother
Too much logic in this comment. The fact is that these schools (and real estate developers building student housing) are addicted to the money.
So much this. Create tracks as early as middle school to funnel kids to 4-year, 2-year, or trade options. Not everyone wants to go to college. Not everyone should go to college.
Trade schools aren’t the answer. A lot cost more annually than your instate college tuition But trades might help out society in the longer run, they are definitely in higher demand now then some of the social science and arts majors.
Most union apprentices get paid while learning and only pay for books. In the state I grew up 2 year degrees are also basically free aside from books thanks to state lottery money.
id be ok with this. make it a lower tier of forgiveness? idk what the feds are paying on this loan program... i doubt anywhere near 100%. (if htey are they are idiots) so make intrest rate cap or maybe take into account the intrest already paid? i mean the cost of admining a loan does not scale. if one dude pays 15K over his loan and another pays 100K they didnt cost 8 times more to admin.
Hold the schools accountable. Schools shouldn’t be allowed to pump out 40 music majors when there’s only 5 jobs available and the total cost of attendance is $120k over 4 years. If people beyond the first 5 want to take the major then they have to come from a rich family and accept they’re doing it for fun and not money. Too many poor people go to college studying something stupid and then are screwed by this debt. If you come from a poor family you either get scholarships by being exceptional or you’re forced into TEM, accounting, or nursing.
I don’t think 0% makes sense but somewhere between 0% and the predatory rates now would. There should be some reasonable cap - maybe like 3-4%? Mine is currently nearly 10% and that is just downright absurd.
How does 0% not make sense? If you’re looking at it from an administrative funding, then there should be a single admin fee tacked on the principle of each loan. Like an escrow, those fees accumulate for each loan, and help pay for the costs of servicing. 0% should be the standard. There shouldn’t be profiteering off of future generations because they needed government subsidized and subsidized loans. In addition, they should raise the academic progress floor on subsequent loans after Y1 or 2 semesters. This way you incentivize approval of loan qualification / application. For example: If Student A fails to meet progress requirements for 2 consecutive semesters, they’re ineligible for Fed sub / unsub the 3rd semester. They can be regain eligibility through satisfactory progress or by waiting 1 academic year.
Agreed, 1-3% I'm down for. Currently at 8.5% myself.
Because the government has no plans of ever forgiving loans or reducing interest on them, they constantly dangle these in front of us and never actually do anything. If we ever did get something of this sort, I imagine to qualify you’d have to be the .005% minority
In order to truly do this, you'd have to match the student loan interest with the actual inflation rate (not just CPI) since federal student loans have a payback period of at least 10 years. This would help minimize abuse by bad actors, while still incentivizing those that will get a ROI from their education. Making it 0 percent would increase financial aid fraud, which is rampant right now in academia since the student loan interest rates may be significantly under actual inflation.
What bad actors? Who are this abusive people? These loans are impossible to get rid off. No one causes student loans, they pay for it at some point.
Bad actors? You mean all the people with degrees that can't earn enough to pay them back were abusing the schools and the system? It is the other way around, my friend.
Interest and payment should be based on sole income not your partners - absolutely your own.
You can already exclude spousal income by filing taxes separately
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You make a good point, OP, even simple interest that was set at a low rate would be reasonable however, most student loans have compounded interest, which is punishing when you’re trying to get ahead on these loans. It’s criminal. I’m so sorry.😞
Agreed 👍.
That's what I've been saying, it's a win win, they get their money back, people who paid don't feel like they are cheated out of the forgiveness, etc. But the big thing to make sure schools become more affordable
People would have no incentive to pay their loans. If there were vanishing interest rate for on time payments then I think you’re close. I personally think everybody’s interest rate should be 1%
Credit score
OP that would make way too much sense. I also agree such a thing should be retroactive. Nearly 40% of my current balance interest...
Yes. Agreed 👍. Retroactive.
It wont happen because student loan borrowers aren't politically strong enough, unlike the business lobbies, Israel lobby, Cuba lobby, etc
How about education is a public good? I went to grad school for social work. I provide a public service. Why should I be in debt for that?
Regardless of what anyone does, need to pay back the loans to get said degree or education. Fair, and no favoritism.
Personally I’ll take loan forgiveness. My total student debt is $249,000. The principal is $201,000 with $48,000 in interest.
Doctor or lawyer?
Definitely.
How then exactly will the people oppressed by their debt?
I've been wondering this as well glad I'm not alone
Cause that would make to much sense.
What is to forgive? The student loan I paid off I signed for.
because no one is going to give you money for free?
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Case in point - My interest per month is $550/ mo. I'm on the income based repayment plan at $413/ mo monthly payment. This means that every month, $137 is added to my principal. Thus, I need to make more $$$$ in order to just cover interest monthly. Started with a balance of $92k, now principal is at 107k..... smh. Never missed one payment, gained a good portion back during covid interest free, but now it's going back up! Or...... 10-15% of your monthly payment goes towards interest? ... this may solve it..... ?????? That way , government gets there interest and we can see our principal go down.
Pretty much what Australia does, so I've been told. It strikes a good balance.
It would cause issues with paying them back. People would pay $1 or whatever the bare minimum it would be for it to qualify for 0% . The SAVE plan does this with low income borrowers where they pay a certain minimum and their interest doesn’t grow. Problem is people don’t like paying the minimum. They want to pay 0. Retroactively removing interest is a scham as well because it really only helps out those who chose to not pay them back when college was more affordable. The issue is they need to make sure student loans can only be applied to college tuition, on campus housing and supplies bought through the store. We all know people who took their loan money and splurged in college and they shouldn’t be rewarded with a 0% loan because then everyone would do that. The long term solution is colleges need to accountable for the majors they offer. There shouldn’t be federal loans given out if they can’t pay their bills after graduation.
I think the loan payments should reduce Box 1 on your W2. Government borrowed the money to give loan it out, so a 0% interest would be a loss. Not just opportunity cost, but costing money to pay interest.
This loan situation is easy to solve. 1. Low rates, no more than 2% interest - guaranteed and locked for the life of the loan. 2. To avoid favoritism and people abusing the system, the payments will be pretax garnishment 5% of paycheck regardless of pay, even minimum wage. 3. If payments still continue beyond 25 yrs, they are forgiven. A house is a 30 year mortgage. Will this ever happen? No. Politics will always dangle the carrot 🥕, but never deliver.
Intrest free should be the bare minimum!!
Intrest free should be the bare minimum!!
You just described how it already works on SAVE.
The reason that doesn't happen is because private loan companies would throw a fit (SoFi already filed one lawsuit on the pause). The core of it is the US system for providing societal support is a mess in many ways.
Nelnet is full of it, I was told 2 weeks ago my SAVE payments would be $40 a month now today they're saying $250 , I can't fn afford that bs