Going to college is an expensive proposition. Need-based financial aid and scholarships help, but many students and families will rely on student loans in meeting the Expected Family Contribution (EFC) for college expenses.
I'm conflicted about President Obama's initiative to expand the number of former students who qualify to have their student loan burden reduced. The conflict doesn't come from expanding who qualifies. It comes from loan forgiveness being a less efficient approach than increasing need-based federal financial aid for students.
As an advice columnist for Bankrate, I've seen the problems that borrowers face in paying down their student-loan debt. To get out from under these debts after a set period of time allows the borrowers to see a light at the end of the tunnel, where they can start working on life goals other than student loan repayment -- like buying a home, investing for retirement, or even saving for their own children's college education.
It's a transfer of wealth from the federal government to the student loan borrower. Is this the most efficient way to reduce the burden of college costs? One of the reasons that college has gotten so expensive is the erosion of state and federal money to post-secondary education over the years.
Would the wealth transfer be more efficient if the federal government increased need-based financial aid to students versus capping student loan payments?
Should we differentiate between borrowers who go into public service versus private enterprise? The program limits loan payments to 10 percent of income for 10 years for student loan borrowers in public service versus 10 percent of income for 20 years for student loan borrowers in private enterprise. The public employees may be earning years of service on a pension that the typical private enterprise employee doesn't have as an option for retirement.
But what's the message the government is sending to people who are now saving to meet these costs -- to forget about Section 529 college savings plans?
Subsidized student-loan rates, caps on loan payments and mandatory debt forgiveness make paying for college after the fact potentially more lucrative than saving for college. However, since PLUS Loans taken out by the parents don't qualify for these programs, and federal Direct Loans aren't likely to cover the EFC, there are still sound reasons to invest in 529 plans for your children's future education.
While I support the Senate proposal that gives existing borrowers the ability to refinance at the same lower rates as new money borrowers, especially if they have a solid payment history, am I alone in thinking that student-loan rates aren't all that expensive?
What other form of unsecured debt lets you borrow tens of thousands of dollars at single-digit rates, with no co-signer, no credit check, while at the same time give you deferral and forbearance provisions to keep you out of credit trouble -- at least for a period of time. I'm talking about federal Direct Loans here, not PLUS Loans taken out by parents, or private student loans. While the inability for most borrowers to discharge these loans in a bankruptcy filing does give the lender some protection, the default rates would suggest that these loans shouldn't be priced at a low interest rate. Student loan rates that don't incorporate a risk premium are another transfer of wealth from the government to the borrower.
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