Student loan Calculations Great Britain

April 2, 2018

In his 2010 State of the Union address, President Obama proposed allowing federal student-loan borrowers to cap their monthly payments at 10% of their discretionary income. Any borrower still paying under these terms after 20 years (ten years for anyone working in the public sector) could have the remaining balance of his loan forgiven at that point. In advocating these changes, President Obama argued that, "in the United States of America, no one should go broke because they chose to go to college."

When President Obama gave that speech, the federal Cohort Default Rate — the fraction of federal student-loan borrowers who default on their loans — was in the middle of a steady climb. The 2008 rate was relatively low — 8.4% of student borrowers defaulted on their loans within three years of leaving school. But the rate would increase from there, peaking in 2013 at 14.7%. The default rate receded slightly to 13.7% in 2014 with improvements in the economy, but it is still only slightly below its peak.

Concern about the number of borrowers who are struggling with student debt has grown with the rapid rise in loan defaults. For example, researchers at the New York Federal Reserve Bank recently looked at loan defaults over a longer window and found that 26% of borrowers leaving school in 2009 defaulted on a student loan (federal or private) at some point. The same group of researchers found that, beyond defaults, 37% of student-loan borrowers had experienced delinquency while repaying their loans. Scholars are also increasingly looking at the broader impact of student debt on the rest of the economy, including its effect on the ability of young Americans to purchase a home. For a sense of scale, a recent New America Foundation study noted that the number of federal student-loan program participants — 40 million — is roughly equivalent to the number of people over age 65 receiving Social Security benefits. The Department of Education estimates that, for those who borrow for their undergraduate educations, roughly one out of every five dollars in loans will go into default at some point.

In Congress, anxieties about this problem have manifested most visibly in continual fights over student-loan interest rates. In the summer of 2012, as low 3.4% rates were set to double on subsidized Stafford loans, Republicans agreed to a one-year, $6 billion extension of those rates after presidential candidate Mitt Romney came out in support of the idea. In the summer of 2013, coverage in the media reached a fever pitch as Congress missed the July 1 deadline, allowing rates to double. Fortunately, a group of bipartisan lawmakers in Congress was able to work out a deal tying student-loan interest rates to the market.

But the deal only bought Republicans a one-year reprieve: In the summer of 2014, Democrats made interest rates a national issue again by bringing Senator Elizabeth Warren's student-loan refinancing legislation to the forefront in the Senate — a move blocked by Republican filibuster. Now, in the summer of 2015 and with the 2016 presidential election rapidly approaching, Democrats have upped the ante again with proposals to make college tuition free or, under some proposals, "debt free."

As one might expect, conservatives have been critical of the notion that the federal government should simply counter rising student debt with various new subsidies — an approach many on the right suspect will only further accelerate the rise in tuition levels that got us here in the first place. They have typically argued that we must focus on the underlying dysfunctions in the higher-education system that are driving the student-debt problem. As conservative writer Reihan Salam noted in a 2012 article in Slate:

Cutting debt payments for cash-strapped borrowers is a nice gesture.But there is a much larger problem that the president's feel-good proposal fails to address, which is the fact that people who take on federal student loan debt aren't earning enough to pay it back. America's higher education institutions aren't offering value for money. And that's a problem that tinkering with the federal student loan program won't solve.

Salam is right about the importance of addressing growing costs and lapses in quality in this sector. Any long-term solution to the nation's student-debt woes therefore must include reforms to better align the interests of institutions with those of their students. There is a lively debate about ways to do this; proposals range from requiring institutions to pay a portion of their students' defaulted loans, to providing students and parents with better information about how a program's alumni have fared, to reducing barriers for low-cost, innovative providers of higher education. Conservatives have also suggested that replacing some of the federal student-loan market with private-sector alternatives would allow the market to enforce some discipline.

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