Basically, if student loans were paid off over 30 years (instead of 10) and defaulted to income-based (and automatically garnished from wages above a baseline), which seems to be the way that student loans are done in most other first world countries, there would be a lot less defaulting, credit history mangling, and suffering.
Just wondering whether 30 year repayment terms will only encourage students to borrow even bigger sums and prompt schools to inflate their prices even more.
And my, how that interest would accumulate. Bad enough on the ten year plan. As I warned my kids, ask yourself, “Who’s driving the Mercedes?” Who’s getting rich off you?
So employers are going to be responsible for collecting student loans and making sure they are paid on time?
Some states do this for child support and there is basically a 10-30 day delay from the time the parent is paid, the money is sent to the state, the state processes it, and it is paid to the other parent. Every time the garnished parent gets a new job, another delay while the stream of payment is reset. Some people, of course, don’t have employers so they have to pay into the state system individually. If a borrower has more than one job? If a borrower becomes unemployed but has assets? Is unemployment office going to garnish UI payments too?
@twoinanddone, read the article.
The Australian system has income-based repayment and no repayment required below a minimum income (such as $40K) along with wage garnishment. And the government seems quite capable of collecting the SS and Medicaid taxes when they are owed in all the scenarios you threw up. Don’t see why this would be a problem.
@GMTplus7, I’m still in favor of the Federal loan limit for undergrads. In fact, I’m in favor of Federal loan limits being extended up to grad school unless you sign up for some debt forgiveness plan before you start (which means that government agencies and non-profits would have to decide on who to sponsor before someone starts grad school). BTW, it’s typically grad school grads racking up those crazy six-figure debt numbers, not those who only went to undergrad (in large part because of the undergrad Fed loan limit).
@lookingforward, think of the compounding interest on a home loan. Yet a 30Y mortgage is typical in the US even though they are typically much shorter duration in other first world countries (and that is a much more massive amount of debt that compounds).
Home loans aren’t supposed to go to people who aren’t credit worthy, don’t have income, etc. It’s counting chickens before you have any to count. (Recent issues taught us that, eh?)
Imo, the way to ease the debt crisis isn’t to pretend lower payments over more time solve much. The bite may be smaller or cause less pain, but it endures and adds up.
According to a couple of minutes of googling, ~20% of student debt will not be paid off/forgiven, i.e., default by any other name.
The Aussies pay off their debt on an average of 9.5 years; they don’t need 30.
The Aussie govt subsidizes the loans, by proving them at below market rates, so the public costs are “significant.” And finally, those Aussies that work overseas don’t have to pay, since they avoid the local payroll deduction. Pretty good deal., huh?
@bluebayou, except that loan forgiveness doesn’t wreck a person’s credit history or force them in to bankruptcy. To me, that makes it significantly different from and more humane than default.
@lookingforward, you say that income-based repayment and longer terms don’t solve much, but then how do you explain much lower student loan default rates in Australia and Sweden?
BTW, @bluebayou, the default rate for the Stafford loan is 22%. So it’s not as if American taxpayers aren’t already on the hook for lots of unpaid loans. So why do you consider wrecking financial lives as well rather than loan forgiveness something positive?
I’m not really concerned with how different cultures, smaller populations, different economic and social situations, different social burdens, etc, yield different norms. I mean, usually I am quite interested in these differences, but I’m not sure there’s a 1 to 1 lesson to be gleaned re: college debt. Kind of reminds me of the old, why can’t our educations systems be like Finland’s? Myriad reasons, layers of them. We’re a very complex country.
We have some sort of deeply rooted notion every kid out there should have a college degree. And a marketing system so strong kids that kids with tenuous financial positions are willing to go into serious hock. And in many cases here, after a lackluster degree, no place to use it.
I’m going to be no use to you on this thread, PT, not even as counterpoint.
We have encouraged our kids to pay off loans ASAP. Not over 30 years.
For federally funded loans, there is already income based repayment…with forgiveness of the balance after 20 consecutive years of payments. But this is ONLy federally funded loans.
And the borrower does get to pay taxes on the amount forgiven at the end.
The best thing to do is have students attend colleges where they ONLY need the $27,000 total Direct Loan for undergrad…at just over $300 a month for repayment for 10 years…this is manageable by most.
Can you point to one post – just ONE – on cc where I have ever advocated such a thing? Puhleeze.
Assuming that to be correct, it is no different than the Australian default rate. So, is if fair to say that you suggest that the Aussie plan is better just because it provides loan forgiveness without recompense to the borrower, (but is just on the hook of the taxpayers, i.e., everyone else)?
yes, they are high. But that is by design (of Congress & the Admin.) If you look at the recent history of the Pell grant renewal/expansion, you’ll note that the powers-that-be chose to fund the Pells by the interest ‘profits’ of Staffords et al. In contrast, as I noted earlier, Australia, for example, subsidizes its loan program.
There is a public cost to the Aussie program, that we in the US have not chosen to absorb. That is a political decision, IMO. Perhaps its outdated, old-fashioned, but that is the political will. (And I guess the answer is to your question of “why”?)
Antiquated? Only if one assumes that college kids should get free stuff. Harsh? Only if one assumes that debt does not have to be repaid.
I don’t see if as political decision, first. Instead, something cultural. I can’t as easily get past the “me” thinking that’s so acceptable and encouraged, wanting what we want, even if we can’t afford it, just to look like others. To fix it, I really think we need a surge in the opposite direction. I’m not saying poor kids shouldn’t have a shot at education. But to me, it is far too simple to say, let’s give them the money! More money, longer terms. As if stretching debt automatically produces better outcome.
Every time we come up with “solutions,” I think we need to take (at least) one further step and see if they actually fit who we are, as a country. Dig deeper.
P.S. We already allow a 25 year repayment plan under IBR, after which the debt is forgiven. Sure, not “30 years” but this is just a small diff.
Not necessarily. In the first place, loans for those that go into teaching, public service, government and/non-profits* are forgiven after 10 years, tax free. *non-profits can include doctors/researchers making bank while working for a medical center. (So we are forgiving debt of those making hundreds of thousands?. Good work if you can get it.)
The other main federal program forgives loans after 25 years, but the tax is not just calculated at the person’s then marginal rate. The taxability of the forgiven debt is a complex formula that uses net worth of the borrower at that time. The taxable amount is also reduced by any amount that could have been deductible expense.
Of course, these programs are so new, no one really knows what the final rules/regs will be 20+ years hence.
If loans of doctors ’ making bank’ are forgiven, they’ve paid off the majority of those loans paying 10% of their ‘bank’ in the years prior to payoff. For forgiveness, the doctor has to make 120 payments, so at a steady $200k per year ÷12 = 1,666 per month, x 120 months = $200k.
Student loan rates are not high, 3.75% for this year, 4.29 % last year. My loans were at 7% and 9%. What rate would be acceptable?
Employers do collect FICA, but it is a tax. I don’t want my employer paying my bills without my control. I don’t want to work in a ‘company town’ and have all my spending choices made for me.
