Student loan – the bigger picture !

“Education is the most powerful weapon which you can use to change the world” – Nelson Mandela

“An Investment in knowledge pays the best interest” – Benjamin Franklin

Obtaining a quality education is the topmost priority of students irrespective of their financial situation, religion, etc. But in today’s world, this comes with a heavy price. The majority of them must go for a student loan to complete their graduation. It is a matter of concern that a person starts his life with baggage of debt.


The stats

Student Loan is one of the largest debts after the mortgage debt. The huge amount of student loan debt in recent times is due to an increase in the number of college-goers and an exponential increase in tuition fees. This type of increase in fee is a worrying trend. In the US alone, the debt constitutes 1.44 trillion including federal and private lending. This is such a huge amount and one can imagine how almost every household is part of this debt. The irony is that with so much spending a considerable fraction of them do not even finish their graduation.

What makes a student loan a complex process?

In most countries, a student loan is of 2 major types (i) Mortgage type loan (ii) Income-based loan.

Mortgage type loan: This loan, also called ‘amortization’, is provided based on the worth of the pledged mortgage held as collateral. The repayment option here is pretty straightforward. Once the student is out of college, their repayment starts after a certain period. This grace period is provided so the student can find a job and start repaying his/her debt. The student is expected to pay the principal amount along with interest and the period is generally around 10 – 15 years.

This type of loan is quite common in most countries. The only drawback with this type of lending is govt./private institution needs to perform extensive BG(Background) checks before lending. Furthermore, this BG check affects credit history too. The repayment process varies across countries; for example, China follows a quarterly repayment rule, India follows a monthly repayment with varied interest rates. In the US, most of the loans are federal but there are a few private institutions that offer a loan.

The risk in this type of loan is that if a student is not able to find a job in a given period, the repayment becomes a nightmare and the pledged property is at stake. Sometimes, the loan is obtained in the parent’s name, which again becomes a burden on the parent if their child is unable to find a job.

These problems are typically seen in for-profit (4-year) colleges where at least 80% of the students borrow. Community /2-year colleges are mostly completed debt-free.

Income-based loan: This type of loan is a boon for the students, where he/she is expected to pay only when they land on a job and for a period of 10- 15 years thereafter. The repayment process is quite complex here because to track down a student after his/ her education based on the income level is quite difficult. Generally, a tax code is associated with a student borrower during their college days and this is used to track their repayment. Since there are no collaterals involved in this type of loan, the federal government appoints private collection agencies to take care of the repayment. Now, this is where the issue really starts.

What do these collection agencies do and how do they make the process complex?

The main concern about them is that they do not explain the process clearly to the students. There are a lot of hidden clauses that the students are not aware of, for example, the increase in interest rate if the student defaults for a couple of months. Most of the time there is confusion on who collects these debts. There is always a fear of ‘wage garnishment when a student defaults on the repayment where the govt. can request the employer to hold off a portion of their paycheck.
Another common concern is that functioning of the collection agencies is not monitored well by the federal govt. which leads to a lot of commotion.

What happens when a student does not repay his debt?

Repayment of loans is a big commitment for anybody, for students, it is an added pressure. In general, when a student is not able to repay his/her debt the govt. can seize their tax refunds, % of their wages, and sometimes even their social security benefits.

In recent times because of COVID all the industries have been severely hit with an increased number of layoffs. For many, it is the priority of what needs to be paid, the rent, or the student loan. This has resulted in an enormous dent in the collection of student loans. 2020 is a year with a lot of uncertainties, the govt. has put the collection of student loans on hold until this December. This could be further extended.

The long-term solution

A student loan is one of the important issues to be addressed by Biden’s administration. There are many voices on social media in support of #cancellingstudentdebt. Though the congress is not in favor of canceling the entire student loan debt, they are seriously thinking about waiving off a portion of the debt. Senator Elizabeth Warren had proposed waiving $50,000 from the debt of every student. Biden has approved an immediate removal of $10,000 from every student’s account because for a major amount to be waived he needs congress approval. As per NPR news, the Biden administration is planning to waive off debt in few public service areas, like nursing students, etc. as an initial implementation.
Moreover, a complete cancellation of the debt would be unfair to a group of students who have already paid the debt and a few who had opted out of graduation for financial reasons.

It is to be understood that a solution to this is not quite easy because of the govt. had been using the repayment funds as an investment in many sectors. The cancellation of the debt in its entirety has many repercussions.

Few changes that can be implemented to address this concern is

  • Reducing the tuition costs across universities
  • Setting up a central committee to monitor the tuition fee and salary of professors
  • Increasing the number of scholarships
  • Implementing an interest-free repayment for the initial 5 years and a nominal interest rate thereafter
  • Celebrities collaborating and maintaining an ‘education fund’

We will have to wait and watch govt.’s proposal in reducing the burden of student loans. As Einstein rightly said, “Education is not the learning of facts but the training of the mind to think”, hope the federal govt. makes the right decision in shaping the future of many students to come. #cancelstudentdebt would be the perfect Christmas gift for many students!

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