A Modest Student Loan Proposal

We can solve the student loan debt crisis. We need to offer assistance with loan interest. The math is plain.

I’m not going to suggest that we forgive the principal of the loan. If I borrow $20 from you, I’ll pay you back.

However, the principal—the $20—is not the problem with student loans. The problem is the interest–or, as I’ve described it before, debt’s “silent assassination technique.”

Some people are paying $800, $1000, $1500 a month against their loans, and less than 10% goes towards their principal. The rest pays off interest.

If someone is $100K in debt at 5% annual interest, their minimum payment is $407 per month. It pays off the monthly interest and zero principal. They’re treading water. No progress. They drown in interest if they pay any less. This is what Ms. Bobé describes in her Tweet, above.  $20,000 in payments, but only a $600 decrease in her principal. I’d drop an F-bomb, too.

Can we simply “forgive” all interest? Some moral codes would say it’s the right thing to do. But I worry that it’s too drastic, leading to further complications. It will only pass the buck.

We want people to lift themselves up by their bootstraps. But first, they need boots.

We give them a hand, let them do the rest. A government assistance program to help pay the interest on student loans could work. If the individual addresses the principal, then government (our tax dollars) can help pay interest.

STOP! Did Jesse just propose free government handouts?!

You might be diametrically opposed to such a solution. There are plenty of valid arguments against what I’m suggesting. But keep in mind, the government is already helping certain groups of borrowers in very similar ways. Programs such as PAYE, REPAYE, IBR, ICR, and PSLF all help certain classes of workers repay their loans. It’s a good start, but these programs are limited in breadth.

I propose we open up avenues of assistance to all borrowers. We can even incentivize people to pay more.  The larger percentage of their income that they put towards the loan, the more interest the Uncle Sam will pick up.

  • This will save the individual money. They pay less interest.
  • This will save the government money. If the loan is repaid sooner, less interest will accrue. Less interest = less help from Uncle Sam. The math works out.

It’s a win-win.

Math Time

Let’s look at an example graduate. This person earns a $50K salary  (assume no raises ever, to keep it simple), but is $100K in debt. Their debt has a 5% interest rate. You know this person. A teacher, a nurse, the guy in the office who’s great at spreadsheets. It’s a normal person.

If this person “only” puts 8% of their salary ($333 per month) towards their loan in today’s paradigm, they will drown in debt. No hope, no end in sight. Forever. Is that a system we want to maintain? Is that reasonable? Is that moral?

At 10% of their salary—$417/month—they will end up paying a total of $390K over 78 years. That is crazy.  The table below (orange) shows this.  

But a person paying that same 10% of their salary in my proposal would get 80% of their monthly interest covered. The loan would be paid off in 22 years, using $111K of the individual’s funds, and $45K from the government.

How is saving $230,000 and 56 years of payments possible? Because interest is the killer. If we help with interest, the rest becomes attainable.

The individual is incentivized to pay more if they’re able. If they contribute 12% of their salary—$500/month—then the government covers all interest payments. The loan will be repaid in 17 years, using $100K from the individual and $41K from the government. Both save money when the individual pays more.

The actual numbers and percentages can be massaged. More strict, more lenient…I’m open to ideas. It’s not the single solution, but one possible solution.

This wave of loan interest is crashing over normal people, with normal salaries, sweeping them out 40 years into their lives with no life raft.

If we help with the interest, we give them a port in this storm.

Thanks for reading the Best Interest blog. -Jesse

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