The Student Loan Programs That Backfired
Sep 5th, 2018 @ 8:38 PM by Amber Nelson
Student loan debt continues to stack up even though there are fewer and fewer people applying for those loans. Student loan applications have plunged 20% over the past six years, while total student debt has skyrocketed by $500 billion in that time to an all-time high of $1.5 trillion. What is going on?
Two government programs aimed at trying to keep borrowers from defaulting on their loans may actually be the cause of this mysteriously growing mountain of debt.
The first is a loan modification developed by the U.S. Department of Education back in 2008 that allows borrowers to have their monthly payments adjusted to a certain percentage of their current income. Although this has helped plenty of student loan borrowers from defaulting by lowering their payments, the interest rates remain the same, meaning that sometimes these borrowers are not making any contribution to the loan principal and so the interest due and their loan total keep ballooning.
The other program is an Obama administration student loan forgiveness initiative. Those who keep up with their payments for 20 to 25 years, will then be forgiven the remainder of their loan balance. This also has kept borrowers out of default but has given them the incentive to make the smallest monthly payments possible. In 2016, the General Accounting Office reported that the federal government will lose $74 billion as it pays off those balances. The newest estimates say the losses could reach as high as $90 billion. Where that funding will come from is not yet clear.
There are other theories that college tuition rates are rising at a faster pace, but that cannot account for all the growth in student loan debt. One can only hope that U.S. borrowers are able to make a dent in this pile of debt before the next financial crisis hits.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.