President Trump just announced* that the government would be suspending interest for the foreseeable future for the federal student loans in view of the coming financial crisis caused by the Coronavirus pandemic. This sounds helpful and generous at first glance. Taking the President’s words literally, however, reveals that this action could actually hurt people. Not help them.
First, this would only apply to loans that the government holds directly. The older style, Federal Family Education Loans (FFEL), Perkins loans, and private student loans would not be affected.
More importantly, this does not mean that borrowers can stop making payments. Regardless of whether or not interest is accruing on a loan, a missed payment will incur late fees and penalties. After 270 days of non-payment, the loans will default and will explode with additional penalties.
Because the stated point of all of this is to provide relief for people who are likely to lose their jobs in the coming months, it is highly likely that a large number of student loan borrowers will misconstrue this action, stop paying their loans, and wind up in default- a far worse situation than had this relief action never been undertaken in the first place.
Frankly, this really looks like a misleading trick.
After Hurricane Katrina, the government did a 6-month forbearance for the victims in/around New Orleans. So everyone in New Orleans quit paying. The servicers never made it clear when/if they had to resume payments, and a ton of people wound up with their loans in default. This hurt them far, far worse than had the hurricane never happened. Here is one example:
…My student loan went into default due to financial hardship after Hurricane Katrina, it has now gotten out of control. Fees added to the loan have raised the balance over 40% I am paying a collection agency 1/3 of my take-home pay to maybe qualify for another program in September. At this rate, I will be dead for 15 years and still owing money. There has to be a solution for people like us or the burden of a population aging into poverty is what America has in store for the future. When you run the numbers on what Medicaid and public nursing homes will have to pay it far outweighs forgiving student loan debts.
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If Trump wants a true stimulus measure, he should strongly consider canceling student loans. Trump could issue an executive order tomorrow canceling all of the loans that the federal government holds directly- about 85% of all student debt. This could be done without having to raise one dime in new tax revenue. This could be done without adding a single penny to the national debt.
To be blunt, the federal lending program is a massive failure, and any good opportunity to push the reset button on it is one worth considering.
This is an historic opportunity for the President to avoid a recession, drain the swamp, and strongly endear himself to tens of millions of voters who would have mostly opposed him this November. To mislead them in this way will not win him much support.
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Watch the video:
Trump Waives Student-Loan Interest, Declares National Emergency
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Talk to you soon.
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