In a society where earning a college degree is becoming absolutely crucial to attaining a decent salary, enrollment in colleges has increased steadily in the last decade. But skyrocketing tuition costs and growing reliance on student loans have also given students plenty of reasons to pause. Moreover, the labor market clearly hasn’t adjusted its pay scale to the increasing demand for educated labor. In addition to the problems of paying for educated labor, researchers suggest that nearly half of all recent college graduates have jobs that don’t fit with their degree.
But the problem does not lie with the jobs; it lies with an increasing inability to pay back student loans. In fact, millions of former students have such large student loans that retirement seems impossible. As a result, a huge percentage of employees either cannot set aside money for retirement or must delay retirement as they struggle under staggering student loan debt. In previous articles, we discussed important ways to save for retirement. This article aims to help students understand alternative ways to save more for their retirement by reducing student loan debt.
Many current repayment plans now allow borrowers to pay low monthly payments as a percentage of their income. At the end of a specified period, many of these loans were eligible for complete forgiveness. But some groups are worried that these programs force the taxpayer to eat the costs of billions of dollars of student loans.
Luckily, student loan lenders are seeing the trend in fewer students are opting for loans and responding with alternative payment options. One such option is a system where investors loan money to students for college with an eye on a piece of their future.
So what does this mean? It means that lending groups will fund college expenses in exchange for a share of a student’s future earnings in an arrangement called an income share agreement.
One of the benefits is that students only have to pay back these loans if they do well after they graduate. Repayments don’t kick in until the student makes more than a certain amount each year. This total can vary, but usually sits between $15,000 and $18,000 a year. But for those who do not do so well, payments can be as low as 5% of total income for 15 years. Such loans also cap the length of time a borrower is obligated to pay at 30 years.
Not every part of these new loans is getting glowing reviews. Under the terms of such income based loans, a student could pay as much as $60,000 over the life of their loan if they borrow $15,000. This means $45,000 dollars worth of interest on a relatively small loan. For these reasons, critics of these claim these new loans are predatory and unfair to the students.
Some of these same opponents believe such loans could undermine the federal financial-aid system by skimming off the most successful students and leaving the less-successful ones with traditional student loans that have no hope of ever repaying.
The concept of an income-based student loan has also proven hard to execute. Many large investors fear a lack of legal protection if a borrower declares bankruptcy or refuses to pay. Additionally, the overall rate of return for loans like these hovers around 10-15%. This can be hard for investors who want to be sure they have a much higher rate of return.
All in all, the feedback from students on these new loans has been pretty positive. Paying 5% of their income for 5 years doesn’t seem like such a bad bet for students who believe they have little risk once they are done with school.
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