Reducing Debt: Is That Really the Government’s Objective?

The Federal government has acknowledged and put into place initiatives to help students/graduates with college debt. They have done this by reducing interest rates, allowing loan consolidation, extending repayment timelines, deferment and, recently, allowing repayment plans to be income based, all the way down to 10% of discretionary income. All of these moves have made it easier to make an acceptable payment. But is it doing anything to reduce the actual amount of debt? I say no.

Each one of plans has allowed graduates and dropouts to pay less and, by paying less, they pay less principle on their loan(s). These programs are doing little to reduce the ever growing amount of student debt. Let’s review each one:

1.    Reducing interest rates – This strategy is used during the borrowing process while students are still in school. A lower rate means more can be borrowed for a similar payment. This brings previously out of the running expensive schools back in the race. It also means schools see this cheap money and can raise tuition higher to grab it.

2.    Loan consolidation – Loan consolidation does have great perks. The ability to only make one payment and reduce paperwork is one. But the consolidation process also opens up the opportunity to extend repayment or chose income-based repayment. These strategies are discussed next.

3.    Extending repayment timelines – Extending the time to repay reduces the monthly payment and makes delays the repayment of principle. By changing the length of a $30,000 loan from 10 years to 20 years, the payment is reduced by $120/month but after 10 years, only reduced by $12,000. $18,000 is still on the books.

4.    Income-based repayment – Income based repayment allows your payment to only be a percentage of your current income and family size. Typically used to reduce the payment to lessen the sacrifice, a lesser payment reduces or eliminates the amount of principle paid.

5.    Student loan forgiveness – There are loan forgiveness programs that eliminate a graduate’s debt after 10, 20 or even 25 years of regular payments. The 10-year plan, the Public Service Loan Forgiveness Program, involves government and 501(c)3 organizations that help our community. Medical professions, lawyers, police, fire fighters are a few of the jobs included. Their debt is paid by public service BUT the debt is just passed over to the government and added to the national debt. The 20 and 25-year programs are for everyone else. So while the student debt number will shrink, way down the road, it’s just moved to a different column.

Other than graduates (and dropouts) paying down their principle by themselves or through a new corporate benefit, student loan repayment by employers, the only way to reduce future debt is to have the current high school students and their families to reduce the amount of debt taken. That requires more research for colleges that will provide the opportunities for the student but at a lower cost. In other words, they need to be better consumers of the college “service”.