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The Federal Student Loan Disaster

Friday June 24th, 2016   •   Posted by Craig Eyermann at 6:53am PDT   •  

Graduation_Cap_and_Diploma According to the U.S. Treasury Department, the federal government has borrowed over $1.036 trillion to loan money to U.S. college students through the Federal Direct student loan program through April 2016, with over 86% of that amount having been added since January 2009.

David Jesse of the Detroit Free Press reports that for the over $605 billion of federal student loans that have come due for payment, all is not going well with respect to former students paying back the money they borrowed from Uncle Sam:

Twenty percent of all federal loan borrowers have defaulted on their loans, according to new data released by the federal government last week,” the Free Press reports. “That translates into $121 billion of loans in default. That same data show 40 percent of all borrowers are not making any payments, and are in some sort of forbearance, delinquency or default.

For students who have fallen behind on their student loan payments, or who are in default, the decision to borrow money from the U.S. government to go to college is looking more and more like an extremely poor choice.

For U.S. policy makers, the exceptionally high rates of payment delinquencies and defaults mean their best intentions have backfired, with the result of harming the people they intended to help the most. The Wall Street Journal‘s Josh Mitchell writes about how what was supposed to be an investment in “human capital” has instead turned toxic:

The U.S. government over the last 15 years made a trillion-dollar investment to improve the nation’s workforce, productivity and economy. A big portion of that investment has now turned toxic, with echoes of the housing crisis.

The investment was in “human capital,” or, more specifically, higher education. The government helped finance tens of millions of tuitions as enrollment in U.S. colleges and graduate schools soared 24% from 2002 to 2012, rivaling the higher-education boom of the 1970s. Millions of others attended trade schools that award career certificates….

New research shows a significant chunk of that investment backfired, with millions of students worse off for having gone to school. Many never learned new skills because they dropped out—and now carry debt they are unwilling or unable to repay. Policy makers worry that without a bigger intervention, those borrowers will become trapped for years and will ultimately hurt, rather than help, the nation’s economy.

The article indicates that some 7 million Americans have defaulted on their federal student loans, which for $121 billion worth of student loans in default, puts the average value of a student loan in default at $17,285.

A monthly payment for a federal student loan with the current interest rate of 4.29% for undergraduates over a typical 10 year term is $177.39 according to the Student Loan Calculator at, or $2,128.68 per year.

Because the money is owed to the federal government, Americans who are chronically unable to make the monthly payments on their on their student loans are not able to have the debt discharged through bankruptcy.

Instead, many of these former students will find themselves placed on the federal government’s Income Based Repayment plan that will instead take up to 10% of their discretionary income out of their pay each month for the next 20 years. The amount of discretionary income that can be subjected to an Income Based Repayment plan depends upon things like how many people are in the household of the student loan borrower.

In practice, except for expiring after a 20 year period, the federal government’s Income Based Repayment plan for student loans is no different from the income tax. Until that period expires, it should be considered to be an additional income tax – one that is specifically imposed on poor and lower middle class Americans.

Just like many of the 7 million Americans who could not afford to continue making an average $177.39 per month payment on their student loans and are now in default upon them. Just like an additional 7 million Americans who have fallen behind on their student loan payments.

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June 2016