US Government: Restructure Federal Student Loan Interest Rates
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It is no secret that student debt is out of control in the United States and only getting worse. In 2017, federal student loan debt passed $1.7 trillion. Currently, federal student loan interest rates range between 4.45% - 7.00%.
Using a conservative 5.5% average interest rate, 2017 alone saw the U.S. Government profit off of indebted citizens to the tune of $93.5 billion. Governmental profits will continue to trend upward, above $100 billion per year until something is done about the growing debt crisis.
I'm proposing a new federal student loan interest rate structure that would balance governmental revenue from interest while reducing the financial stress on millions of Americans.
I went to a private college in the heart of Michigan. While I cherish my college education, 11 years after graduation, my financial health wishes I had never gone.
Using the Stafford Loan Program through the US Government, I was able to pay for school and that allowed me to continue on to graduate school where I received an Assistantship that paid for my graduate degree.
I consolidated my federal loans and set up a graduated payment plan to have my monthly payments rise over time to pay off the loan. The grand total of my consolidation: $80,000.
That was in 2014. More than 5 years later, my current principle balance is $75,000.
I have paid $400 or more each month for 65 months. Commonly paying a little more than the minimum required amount. That is roughly $26,000 in payments.
Only $5,000 has gone toward my principle. The remaining $21,000 has contributed to the growing interest profits of the US Government. How can we fix this so the US Government serves the people who hold student debt while not making them feel like they'll never be financially free?
We can philosophically argue about whether someone should or shouldn't go to college depending on their chosen career path, or the growing cost of tuition, or policy proposals like blanket debt forgiveness.
However, let's focus on this issue specifically and what we can do in the short-term. Those of us who already have our debt in hand and are struggling to find the light at the end of the tunnel when it comes to that debt's repayment.
The primary culprit is the unacceptably high interest rates assigned to federally held student debt.
Individuals who have student debt, millions of citizens in the United States, delay other major milestones like buying their first home, buying a reliable car, starting a family, or starting that business they always dreamed of starting.
It is hard to get a good mortgage when you're currently paying one on a house you can't live in (your education).
The student debt epidemic is stifling economic and personal growth of millions of Americans. Nothing is more demoralizing to an entire generation of young professionals than trying to balance rent, expenses, etc. and watching their principle loan balance GROW after making their monthly payment.
It is a hole many feel they will never dig themselves out of and the US Government is not helping them by charging a king's ransom in interest each year.
Federal Student Interest Rates are tied to the 10 Year Moving Average of Inflation + 1.5% as a service fee. This would allow the US Government to still earn a substantial amount of revenue while giving debtors much needed relief.
Using the 2017 example, the effective interest rate would be 3.3% (1.8% 10MA of Inflation + 1.5%) and would still result in a total interest earned of $56.1 billion.
That is an immediate 40% reduction in interest being charged to already desperate student loan borrowers.
Year - Adjusted Interest Rate (including +1.5%)
2005 - 3.9%
2006 - 4.0%
2007 - 4.0%
2008 - 4.2%
2009 - 4.0%
2010 - 4.0%
2011 - 3.9%
2012 - 3.9%
2013 - 3.9%
2014 - 3.9%
2015 - 3.6%
2016 - 3.4%
2017 - 3.3%
2018 - 3.1%
2019 - 3.3%
This change could easily be drafted into a bill in the US Congress and implemented into the federal student loan program effective 2020 or 2021. Every year on January 1st, the new yearly interest rate is updated according to the 10 Year Moving Average of Inflation in the United States and debtors are charged accordingly.
This type of policy would be fiscally responsible for the United States and greatly improve the financial and psychological well-being of millions of Americans. Hope is a powerful thing, that one day they can fulfill their financial obligation of paying off their debt and moving forward unencumbered.
Studies have shown that additional discretionary income creates a multiplier effect in local economies. This change in interest rates, without doing a blanket debt forgiveness program, would still result in a massive injection of new discretionary consumer spending in local economies around the country.
A win-win for the US economy and the millions of Americans who dreamt of a college education and bright financial future.
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