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Student Loan Proposal that Could Change How Students Borrow

Posted By:  |  June 18, 2014  |  0 Comment(s)

The rate of default is driving up the cost of student loans for some colleges. Default rates two years out from graduation range from 12.4% to 37% and higher in some instances. This is a problem because of how higher institutions qualify for participation in Federal Direct Loans, FFEL (Federal Family Education Loan) Program loans and Pell Grants. Those that have student loan default rates of 25% or more may be barred from accepting students with these loans until the end of September 2015, unless they appeal. Richard Green, a contributor writing for the Forbes website wants to tie student loan rates to the ten-year treasury rate, currently at 2.66%, because student loans typically have a ten-year term. Federal student loan rates are now at 4.66%. Here’s his proposal:

“Pricing loans differentially based on the default performance of students at different colleges would give administrators a strong incentive to make sure their students did not default.”

How does this incentivize administrators? Making sure students get what they pay for, a marketable education, leads to lower default rates. Thus, the institution will be eligible to accept more students with lower interest rate loans. Lower rates for students attract a bigger student body, making the school more economically secure.

Does Mr. Green’s proposal have legs? It could be part of a comprehensive package addressing the student debt crisis. It ties student loans to the “real” economy. It may take a while for a proposal like this to make it to the halls of government. Private solutions for student debt are available now.

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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