Student Loan Reforms to Watch for in 2017
So far, the Trump administration continues to deliver on some key campaign promises. These promises include the travel ban, federal hiring freeze, and authorizing the construction of the US-Mexico border wall. Higher education is another issue Trump will likely be addressing in the coming months, as it continually ranks as the biggest source of consumer debt today.
According to the student loan debt clock, the total is 1.47 trillion. The balance owed is almost as much as the total credit card and auto loans combined. Here are a few more alarming statistics:
- 44.2 million Americans have student loan debt
- 11.1% is the delinquency rate
- $351 is the average monthly student loan payment (borrowers aged 20 to 30 years).
- $203 is the median monthly student loan payment (borrowers aged 20 to 30 years). (Source: studentloanhero.com)
Educational institutions are finding it convenient to charge more, given that the Federal government takes on most of the risk for defaults while schools and universities reap the financial rewards. It’s a discrepancy President Trump commented on late last year:
“If the federal government is going to subsidize student loans, it has a right to expect that colleges work hard to control costs and invest their resources in their students. If colleges refuse to take this responsibility seriously, they will be held accountable.”
Trump has suggested institutions create lower tuition costs by establishing large endowment programs, otherwise they could face the potential loss of their tax-exempt status, according to Forbes contributor, Zack Friedman. Endowments make withdrawals from invested capital, and could help bring down the cost of tuition and, consequently, the amount of student loans.
Here are several proposed pieces of legislation we could see enacted this year to try and help student debtors:
Reauthorization of the Higher Education Act (HEA)
The HEA was established in 1965 as the official legislation governing higher education. Every 5 years, the legislation is amended and reauthorized by congress. Here are several of the proposed changes:
- Federal Application For Student Aid Simplification (FAFSA): FAFSA is the primary application process for students to apply for loans and work-study programs. The change would allow borrowers to continue using tax return data from two years instead of one.
- Flexible Pell Grant for 21st Century Students Act: Increases the number of grants an eligible student could receive during a semester.
- Stop Taxing Death and Disability Act: Discharges spouses and families from student debt liability after the death or disability of a borrower.
- Employer-Incentivized Student Loan Repayment Plans: The government wants to incentivize companies to offer repayment programs to help graduates payoff their student loans.
The Student Loan Bubble
Tuition increases and the number of student loans taken out are becoming a drag on parts of the US economy, much like housing. Many millennial workers are waiting to buy houses until they’ve paid down their student loans. The connection is ironic given the similarities between the two debt issues, primarily because of the bubbles that have been artificially inflated by government intervention into the markets.
While Federal-backed student loan programs are helping many students find funding for education, they’re also making it too easy to take out exorbitant amounts of money. In trying to bring everyone the chance to earn a college degree, the Federal government is once again guaranteeing loans for individuals who wouldn’t otherwise qualify.
What’s being created is a similar bubble that will leave many overextended debtors defaulting because they have to choose between making their car insurance and paying their student loans. Unlike the car, however, a student’s degree can’t be repossessed, which makes taking out loans even more enticing to young people looking to get an edge in the job market. However, just like with the housing crisis, US taxpayers will be left paying for the defaults after the government steps into bail them out.
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