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Cut Student Loan Rates!

By Terry Savage on July 03, 2019

Student loans are about to become a big political issue in the 2020 election. That’s a shame because it guarantees that nothing will get done to solve this huge $1.6 trillion problem that not only affects 40 million debtors but also the entire American economy. So, from both a moral and a practical viewpoint, a sensible compromise must be reached.

It’s not “fair” to burden an entire generation with repayment of expensive student loans. But it’s equally unfair to those who have worked for years to repay their student debt to give others a clean slate. Just because out government brazenly accumulates debt with no possibility of repayment, there is no reason to extend that immorality to the rest of society.

Now that I’ve ruffled your feathers, consider this middle ground.

Today, the United States government borrows for 10 years at an interest rate of about 2 percent. That rate is set by the marketplace at the regular Treasury auctions. Every year the interest rate charged on new student loans for the upcoming year is determined by the 10-year Treasury note auction in May — plus a “premium” for risk.

The student loan interest rate for loans for the 2019-2020 school year is 4.05 percent — about twice what the government pays to borrow! (Parents pay over 7 percent on “Parent Plus” loans.) But many grads are paying off loans that still carry double-digit rates, since the original annual rate does not re-adjust.

Everyone knows the government can’t repay its borrowings. Why is a student loan any riskier, requiring a higher rate, since it can’t be defaulted — and the government can eventually take its repayment out of your Social Security check?

Proposal: Set the interest rate on student loans at 25 basis points — a quarter of 1% — above the 10-year Treasury note interest rate, and adjust the rate on all student loans quarterly.

Since everything is computerized, that shouldn’t be difficult to manage. Banks do it with adjustable-rate mortgages.

That kind of rate structure will make current new student loans more affordable. And it will alleviate the burden of the more than $1.6 trillion in loans outstanding at higher rates.

Solution: Immediately lower the rate on all outstanding loans to the new formula — and “re-age” the outstanding balances to reflect the new, lower current rate of about 2.2%.

That would lower the outstanding burden of debt while still requiring students to repay the original principal. In reality, after the older loans are restructured to reflect lower lifetime rates, many borrowers would be surprised to find their initial borrowings, plus a small interest charge, would already be fully repaid!

It’s the interest on the interest, especially at old, higher rates, that is the true burden of student loans on borrowers.

There’s plenty of precedent for this kind of change. Credit card issuers regularly “re-age” outstanding balances, and adjust rates retroactively in order to give consumers a chance to get out of debt. Surely, this precedent is worth following to give an entire chance at creating a productive life for themselves — and the American economy.

One other part of the solution: Our colleges and universities should shoulder some of the blame. Instead of just handing out this “free” Federal money, the schools should be required to repay half of the loan balance for any student that fails to graduate. Some skin in the student loan game might be just what the education system needs!

Lately, the concept of compromise has been confused with capitulation in our social discourse. Student loan debt is crying out for sensible and immediate action. America never believed in debtors prisons, and there’s no reason to imprison an entire generation in student loan debt. A moral and financially reasonable compromise is in order now. And that’s The Savage Truth.

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