$1.2 trillion.
As of June 2014, the overall student loan debt in the United States exceeded $1.2 trillion dollars with over 7 million debtors in default.
Even if you personally have no student loan debt, it touches all areas of the United State’s economy. That trillion dollars of student loans means that students are paying a trillion dollars on loans instead of spending and investing it in other areas of the economy.
While the cost of a college education has continued to rise at dizzying heights, the question of why the cost of college is increasing – and in turn, student loan debt – is a question for another day. Instead, today I’ll discuss three ways the government can provide student loan debt relief.
1) Allow Refinancing of Student Loan Debt
Over $1 trillion of the $1.2 trillion student loan debt is in Federal Loans, yet there is no opportunity for borrowers to refinanc.
Earlier this year there was proposed legislation by Senator Elizabeth Warren to allow those with student loan debt to refinance their debt if the current interest rate is lower than their rate. While this legislation was blocked by Republicans, it brought attention to the student loan issue.
Warren’s bill would have cost the U.S. government $60 billion due to lower interest payments. To fund the bill, Warren proposed raising taxes on those making more than $1 million a year, which is why Republicans opposed the bill..
Student loan refinancing would provide relief to millions of graduates who have a higher interest rate simply due to the fact that they went to college when rates were high. It makes sense from an economic standpoint, and private student loans can already be refinanced.
My personal opinion is that alleviating student loan debt in the United States should be given a high priority. U.S. foreign aid is around $37 billion a year, and between $4 and $6 trillion will be spent on the wars in Iraq and Afghanistan. I think there is a strong argument that focusing on solving economic problems in the US should be given a priority over certain foreign aid and nation-building efforts.
2) Eliminate the Limit on Student Loan Interest Deductions
One thing those with student loan debt will realize quickly is that they can only deduct up to $2,500 of student loan interest on your taxes. Because of this relatively low cap on student loan interest deduction, people who have a large amount of student loans see limited relief from this tax deduction.
One thing the government could do is either eliminate the limit on student loan interest deductions. After all, the people who have the most student loan debt are the ones who need relief the most. Putting a cap on the interest rate deduction allows the government to show they are giving “some” relief without causing too much of an impact on tax revenue.
3) Tax Credit for Student Loan Repayment
A few years ago the U.S. government gave an $8,000 tax credit to first time home buyers to stimulate the economy. While the validity of whether such programs actually increase economic activity or have an impact long-term, the government has a history of using tax credits and other fiscal levers to spur economic activity.
With student loan debt weighing on the economy, a tax credit would alleviate some of that pressure and encourage 20-somethings to become greater participants in the economy – at least temporarily. A tax credit would be a much costlier solution, though, than increasing or eliminating the amount of student loan interest that can be deducted for tax purposes.
The tax credit – among other government relief efforts – face an uphill battle primarily because the U.S. government makes a sizable profit on student loans. In 2013 they made over $41 billion from student loans. No politician wants to lose that revenue stream because they’d have to make up the difference elsewhere in the budget.
__________________
I would label myself as a libertarian, which makes this post a bit ironic. What I wanted to highlight in this post, though, is that there are options available to the Federal government to help alleviate the massive amount of student loan debt. Additionally, I wanted to point out that politicians are not focused on student loan relief and put other things – like foreign expenditures – higher on their priority list. Finally I think it’s important to realize that student loan debt puts a drag on our economy – at least every part of the economy other than higher-ed institutions.
There are a number of people who are advocating for full student loan forgiveness on the government’s dime. I definitely do not think that makes sense from an economic standpoint because you set up a precedent that will encourage even higher level of borrowing in the future to alleviate
Personally I think that student loan refinancing should be an option, mainly because it’s really a matter of “luck” as to whether the interest rates are high or low when you take out loans for school. I also think that eliminating the cap on the student loan interest rate deduction is a no-brainer reform that should be embraced by both parties.
Check out DC’s new book Hustle Away Debt to learn everything you wanted to know about making money through side hustles!
Do you think student loan debt will continue to grow in the United States? Do you think the government should do anything to provide relief? Do you have any ideas on how to lower the cost of a college education?
____________
Photo by Queen’s College
Check out some of our favorite personal finance resources:
Are you getting the best credit card rewards? Check out the top cash back credit card offers (updated daily)
Make extra money: 15 ways to make money from your computer
Get the First Chapter Free!
Join our online community and get the first chapter of the book Student Loan Solution absolutely FREE!
Meaty subject, DC, and definitely hard not to make political. I’m one of those goofballs who thinks that higher education should be free. All of the money spent on wars and foreign aid should be used on the future & present taxpayers of America. Same goes for health care. We pay the taxes, why shouldn’t we get all the benefits of that money?
I think the government should make it easier for people to refinance their loans at today’s low rates. It makes no sense to me that that hasn’t happen yet. I DO NOT believe we should seek out full forgiveness. There is no money, people!
Touchy subject for me. Of course student loan debt will continue to grow, the government is making money from it. That’s all that matters.
I personally think we should put the risk back in lending by reinstating basic consumer protections for all student loans. Schools continue to raise tuition so long as lenders are willing to lend more and more because it’s risk-free to them. They get their fill and students/grads get the bill. I also like the idea that higher education should be free. Fat chance with money hungry politicians though.
I have never been able to use the interest rate deduction. My husband and I file taxes separately so we incur this stupid tax penalty. We file separately so that his income does not reflect my monthly payment under IBR. If we filed jointly, he’d pretty much be paying my student loans, which I took out before I even knew he existed.
debtperception Great points. I think it may have been unintentional (or maybe not), but the government is making a ton of money from those student loans. However, I think the private student loans can be a bigger burden. So I also agree about reinstating consumer protections. It’s a complicated solution though if bankruptcy is allowed (although it was at one point) since it might be too easy for many grads with no assets to discharge that debt.
Good post DC and kudos for taking a somewhat political approach to it. :) I know you said the rising cost is a different topic for a different day, and would agree, though think that’s a big part of the issue. That aside, this is a huge issue in its own right and definitely think that there needs to be ways to make it easier for those trying to repay their loans. I think refinancing is a no-brainer as is the elimination of the cap to a certain extent. Sadly, or ridiculously depending on how you look at it, far too many of the politicians are concerned about things like foreign aid that’s basically going to help war efforts. Until something serious is done I fear student loan debt is only going to continue to rise.
I would think that at some point, the government would want to get more involved.. young adults are putting off getting married, buying homes and starting families…largely due to things like student loans. It’s crippling the growth of our economy.
If they allow for refinancing, I do also thing that they need to make it a REQUIREMENT that Federal Aid to universities (meaning, the availability of Federal loans and grants for attending students) should be tied to the rate the school raises tuition compared to the rate of inflation.
That would mean that if a school’s tuition is increasing 10% each year, the school would be ineligible to offer its students any Stafford, Direct, or Perkins loans and no longer able to provide Federal work-study or give Pell Grants because the tuition is outpacing inflation.
Tuition will keep rising because colleges know there is this source of “free” money that will never end–federal student loans. Until the flow of “free” money is threatened to be cut off for a college, tuition will keep rising and student debt will keep increasing.
I agree with Elizabeth Warren’s proposal of allowing students to refinance, although instead of going after $1M salaries, I would rather go after $1M and above capital gains taxes, as someone making $1M in paid-income is already paying quite a bit in taxes, but someone making $1M in capital gains is at most paying a 15% tax rate, and that’s before deductions.
As far as your #2 proposal, I agree about lifting the caps on deductions, although I do not think that people making $X salary or more should be able to make deductions. Currently, my brother has loan debt left from attending Columbia Law, but since he makes more money than the average Joe as a corporate lawyer, he is ineligible for deductions on student loan interest. I would keep the income cap on loan interest deductions the way it is.
I have loan debt. I currently have about $16,000 left, after starting with $50,000. I never had any private loans, but my grad school loans, which were around $30,000 of that $50,000, were at interest rates of 5% or higher. It sickens me that big corporate banks pay nothing in interest while the Federal government is relying on the poor college graduate to fund their government. That has got to change.
We can’t have total forgiveness on the government’s dime because there is no such thing as the government’s dime. I like to think we will see a decrease in student loan debt as more options become available and as kids wise up with regard to what is feasible.
kay ~ lifestylevoices.com I am definitely on the same page as you when it comes to foreign aid. A lot of federal foreign aid goes to waste, and the fact that our nation is in debt and has it’s own problems means we should focus on those issues first. I think nonprofits like Feed My Starving Children are much more effective at reaching out to those in need.
Holly at ClubThrifty Haha that’s a tough argument, though, because apparently it doesn’t matter if there is or isn’t money – spending keeps increasing! But yes the refinancing option would be a good one. I hope we move that direction in the future, though it also has it’s own funding issues (according to Republicans).
Andrew LivingRichCheaply debtperception Declaring bankruptcy definitely has a ton of issues, though the whole co-signing requirement of student loans alleviates that somewhat. If loans were not co-signed why the heck wouldn’t you just declare bankruptcy right when you graduate? You could live at home or with friends until your credit rating improves and you’d be socking away a lot more in savings.
But yes, it’s a complicated issue. There’s no reason for schools to decrease tuition. Why should they? They’ll get paid no matter what because access to student loans is very open.
FrugalRules I definitely think we need to start advocating for priorities in the Federal budget. Having a program that allows people to refinance student loans would benefit not only grads that are in debt, but also future grads and the economy as a whole. At least it would help a lot more than foreign aid does.
BudgetforMore I’m not one for asking the government to “fix” something, but I do think that refinancing student loans or lifting the cap on student loan interest should be much higher priorities than some of the Federal spending today. It definitely isn’t helping our economy.
This is a good post. I work at a university and unfortunately see my students taking out massive amounts of student loans that some need and others don’t. I was one of those people who didn’t need it, but I did anyway. I was stupid. So I would directly benefit from these programs. At the same time, I am conflicted by the subject because I knew what i was doing. I took out the loans and I feel morally obligated to pay them back. I don’t take advantage of the programs currently available for loans because I want them gone. Personally, I think a couple of things should happen: 1) implement a program for paying back loans that is similar to Australia (they base payments back upon degree, type of job, and income over a specific period of time); 2) I do think we need to talk about the financing of universities. I am not necessarily in favor of total public financing, but federal and state governments have actually cut the monies they give to universities, which make them more reliable on tuition dollars. Not saying that we should just give them what they want, but we should have a larger conversation! Excellent post!
I am a firm believer that the traditional model of a college degree is flawed. You should be able to take classes to get your degree without all the extraneous stuff that is included to make a well rounded education. We can’t afford well rounded anymore.
I also think more counseling should be done before loans are dispersed. If someone wants a liberal arts degree with no specific direction but wants to take out $100,000 in loans to get there, that should be a real red flag. They would not let me borrow a half million dollars to buy a house if I made $25K a year, why can students borrow so much without any sort of salary discussion?
I do think being able to refinance loans is a great idea. I just think better information going in would prevent people from racking up debts they have little hope of being able to pay.
DC @ Young Adult Money Andrew LivingRichCheaply debtperception It’s not that simple to just file bankruptcy. Student loans in particular would have to go into default/collections first.
debtperception DC @ Young Adult Money Andrew LivingRichCheaply Fair enough, however difficult or not difficult it is, though, it would be a realistic (and potentially highly profitable) option for new grads.
tarazee Thanks for sharing your thoughts. I don’t think the cap on deductions should be lifted only up to a certain income level. I think your brother took a risk by taking on the debt and going to law school, so he at least deserves the same relief that others paying back loans receive. That’s just my opinion, I’m sure many would disagree.
Mark@BareBudgetGuy You’re more optimistic than most. I personally hold the opinion that well over 90% of prospective college students are not concerned about student loans and are focused more on going to the “right” school and getting the right degree.
Jason Edwards1 I’m glad you enjoyed the post! It’s a tough issue and there doesn’t seem to be one clear solution. I think there are a lot of things that can help solve the problem, or at least put a bandaid on it, but long-term I’m not sure what the best solution would be.
Eyesonthedollar The college system is such an integral part of life now that I don’t really see it changing much, regardless of whether change would be good. I think you raise a good point though. Why should I have to take a science class to get a finance degree? I have never and will never use geology in my finance career. If I had a more career-focused class, like “Accounting Systems” or something, I’d be better off. But again, I don’t see it changing anytime soon.
I think its great that there are programs available for students to refinance their student loans. For those who have Sallie Mae loans I encourage them to run as fast as they can to refinance their way out of that hot mess. Don’t have enough time to discuss the horror story.
Debtfreemartini Hmmm I wasn’t aware that there were any programs out there? I know there recently was a new policy with some of the private lenders to allow refinancing, but only if you are facing financial hardship (i.e. job loss).