Student loans. It’s been a hotly debated topic in the government for some time. With many Americans crushed under the weight of them, it’s often been questioned whether student loan forgiveness should be easier to obtain. It’s become very common for borrowers to default on their student, which is leading to many pondering solutions.
If current trends continue, it’s expected that student loan defaults could be up to 40% by 2023. This is a problem not only for the individuals who default, but also the economy as a whole. A defaulted student loan means poor credit — poor credit means lower homeownership and lower purchasing overall. As student loans default, the cost of student loans will rise. Student loan companies are going to need to increase fees and interest rates to compensate.
A failure to pay student loans could ultimately cost a student more money, insofar as they won’t be able to purchase a home (and will keep paying rent) and will pay higher premiums when they do need to finance things (such as cars). At a certain point, it will become non-beneficial to pay student loans at all: if the majority of people aren’t paying student loans, then the individuals who are paying their student loans will see no point in continuing to do so.
Consequently, there’s also a cascade effect involved. While lenders can do something about 20% or 30% of individuals defaulting on their student loans, there’s little they can do about 100% of individuals deciding on defaulting on their student loans. Collecting on all of the loans will be costly in and of itself, in addition to potentially causing substantial harm to the economy.
In the wake of the above concerns, Senator Lamar Alexander has suggested deducting student loan payments through payroll rather than leaving it up to borrowers to pay for their own loans. This would solve some economic problems: the loans would definitely be paid off (at least, most of them), and the borrowers would not be allowed to fall behind. By safe-guarding these individuals’ credit health, it’s possible that the economy could be protected.
Understandably, there are some concerns. Opponents to this measure argue that it would unfairly harm lower income borrowers, while also making it so that borrowers didn’t have the freedom to plan out their own finances. And while it does solve the problem of individuals not paying their loans, it doesn’t solve a greater problem: the fact that many individuals can’t afford to pay their loans. It would only be shifting the debt elsewhere: if their student loans are automatically deducted, it may be rent or utilities that they instead choose not to pay.
Deducting student loans from payroll is very similar to the process of wage garnishment, which is a process that should not normally occur without going through the court. However, government student loans are exempt from this court process regardless. Because of this, this proposal would only impact public student loans and not private student loans.
Payroll deductions for student loans are only a proposal. However, economists do want to take note that it is a proposal to a rising problem. The more individuals default on their student loans, the less likely it becomes that student loans are going to be paid at all. If individuals find it more desirable to strategically default on their student loans than pay it off, many may do exactly that. This could lead to an incredible level of economic tightening, due to the sheer amount of money that is currently held within these loans.
There are several proposals regarding student loans; payroll deduction is only one of them. Another popular proposal is the ability for employers to donate money tax-free towards an individual’s student loans. This conveys a few benefits: it allows employers to recruit top talent while also rewarding employees for their work. However, this does mean that the money will effectively be coming from employers and going to the student loan industry, which some still feel is likely unfeasible due to the dramatically and continuously rising costs of higher education.
With $1.5 trillion held in student loans presently, the future of student loans may very well determine the future of the economy. As the recession looms, it becomes far more likely that more people are going to default on their student loans and let the chips fall where they may. This is something for investors and analysts to consider when looking at the months ahead.
Regards,
Ethan Warrick
Editor
Wealth Authority
