Student Loans – $10,000 or 0% interest?

I did a poll recently about student loan forgiveness, and wanted to share my thoughts now that the results are in.

Clearly the 0% interest won out with 73% of the vote, followed by $10,000 forgiven with 18% of the vote, and Neither got 9% of the vote.

Here are my thoughts:

• The student loan system is broken. People are borrowing money they can never repay and the government is making a killing on the interest. Student loans are actually listed as the federal government’s number one asset.

• Many people have made enough payments that the initial amount they borrowed has been paid back, but they still owe more in student loan debt than they initially borrowed. This is the result of unfair interest practices such as capitalization (adding the interest to the principal balance then charging interest on top of that) and payments that don’t cover the accruing interest. That’s right – many borrowers who make a payment actually see their balance go up every month (there are several repayment plans that allow you to pay less than the accruing interest each month).

• I agree with those who said that $10,000 is a band-aid solution. Of course anyone with about $10,000 owed would like to see the forgiveness, but many people have balances of $30,000-$40,000 or more. Many of them will see that $10,000 get erased by more interest after a few years.

• The $10,000 is likely to be challenged in court. Will it survive? It’s hard to say.

• I think we will see an attempt to have $10,000 forgiven before the midterms. I also think the payment pause will be pushed until after the midterms. With low approval ratings for the Biden administration and high inflation, Democrats are looking for a win. The author of this article thinks that doing the forgiveness could actually cause the Democrats to lose the midterms. Interesting thought…

• Many questions remain about forgiveness, for example: Who will qualify for forgiveness? Will current students qualify (including incoming freshman taking out their first student loan this Fall)? Will it be tax-free?

• Many are also asking about the 80% of Americans who do not have student loans – do they get a $10,000 check? Do they get $10,000 worth of mortgage forgiveness or credit card forgiveness? Some people are mad that they have paid off their loans or didn’t take out loans, and they see the $10,000 as an unfair bailout.

• 0%, or very low interest, would be better for the majority of borrowers. They would have the ability to focus on actually paying down the principal balance.

The student system needs a complete overhaul. Lowering the interest rate would be a good start. Unfortunately, it is not being talked about much on Capitol Hill, because they don’t really want to lose all that money they are earning by charging (relatively) high interest. It will be much cheaper overall for the government to forgive a relatively small amount but keep interest right where it is.

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