Problems Facing Loan Repayment to US Students
The US students have been exposed to several problems concerning loan repayment, amid the rising unemployment rate. The total amount owed to the US students from 2004 was valued at $1.5trillion. There was a direct relationship between the student loan debts and the course a student studied. Besides, an observation was made, whereby students who took loans with private financial institutions, were blacklisted from accessing further loans. Consequently, this would affect the student adversely, in the wake of student loans being waived for six months in the wake of COVID-19. Finally, another cause of the pile-up of the student loans is that some students would borrow money from different organizations, with high expectations of getting employed immediately after finishing college. Therefore, the loan defaults can be attributed to taking a course with less demand, taking loans from the private sector, and taking loans from several banks, hence overwhelming the student in the process.
One of the reasons for the rise in loan defaults and apparent pile up in loans the students owing to the governments and banks are taking a course that has low marketability. After college, the students would struggle to get decent jobs related to the course of study (Friedman, 2020). As the graduate struggles to get a job, the already borrowed loan continues to attract interest. If the student gets a job, at last, the piled-up interest on the loan becomes hard to repay back, forcing them to apply for unemployment benefits. If the loan reprieve is acknowledged, the loan becomes a burden to the federal government, apparently becoming part of the loan default. Therefore, taking a course with low market demand might make a student fail to secure a consistent job, apparently resulting in an increase in loan owed to them.
Taking a loan with the Federal Family Education Loan (FFEL) Program has had a negative impact on loan repayment. After the outbreak of COVID-19, the federal government scrapped all loans for students under federal loan accounts, which meant they did not have to pay the loans for the entire period. However, the beneficiaries of this reprieve were those under the federal loans, which means the students under FFEL were still required to repay back their loans during the entire period. Although some lenders have revised the loan repayment downwards, some of the students working on a casual basis have been struggling to repay the loans, after losing their jobs to the coronavirus (Douglas-Gabriel, 2020). It is expected that penalties and interest on loans will become too high to repay, consequently causing the internal federal debt to increase. Besides, the borrower’s credit score will be affected, making it hard for them to borrow in the future.
Students with loans from the FEEL program have also been subjected to complex payment terms, which has affected them negatively. In the case study of Engstrom, who has been paying $1,000 for his student loan, complex payment terms have been introduced into the Direct Loan Program, making it more expensive in the long run. For instance, although his loan repayment was lowered to $150 per month, an extra $26,000 was to be added into the principal loan owed to him. It means that the amount. However, Engstrom and other students like him in the pram could enroll for a revised pay as you earn (REPAYE), which would reduce the amount an employed person would be deducted to repay their student loans. Therefore, enrolling in the FFEL program would have a negative impact on loan repayment.
Another reason for the increase in the number of student loans is taking loans from multiple sources believing that they will get high paying jobs. Taking huge loans eventually becomes a huge challenge when it comes to repayment. Failure to repay student loans in time leads to a negative credit score, which affects the student’s ability to borrow in the future. In addition, it becomes hard for the borrower to save and invest in the future since most of the money is channeled towards the repayment of the loan. In other cases, the student might lose their job, or fail to secure one, leading to negative performance in terms of debts.
Failure to repay back student loans brings negative consequences to the borrower. First, failure to repay loans makes the student lose access to federal programs and repayment tools. For instance, defaulting to repay loans locks out the borrower from accessing forgiveness, or getting an extra federal aid awarded to students. Additionally, the borrower can also be denied repayments, which is tied to the income levels. Second, failure to pay student loans might result in a tough collection process. During the process, the loan collection agency might impose up to 25% of the principal amount that was awarded to the student. Besides, the interest on loans continues to accrue. In order to make sure the money is collected, the employer forwards a certain percentage to the collection agency.
Failure to repay the loans might result in blacklisting by creditors and also damage the chances of getting a job. When a student loan borrower fails to make a repayment on loans for three months consecutively, the records are taken and kept for the following seven years. Poor credit score means that the borrower cannot be eligible to get some loans or credit cards. Failing to pay loans might also lower the chances of getting certain jobs. Similarly, employed people might also put their work at risk. For instance, members of the military, employees of the federal offices, and contractors might lose their jobs, get denied licenses to operate, or not get promoted for defaulting loan repayment. Failure to repay loans might have one’s license revoked, which could cost them several opportunities.
In conclusion, many students have defaulted in repayment of loans for various reasons. First, some students enroll in courses with less demand in the market. Second, some students were enrolled with FFEL, which did not waive loans during the coronavirus, exposing the students. Third, some students take heavy loans believing that their courses will earn them large salaries. The three factors contribute to an increase in the loan default. Failure to repay student loans leads to blacklisting by financial institutions. It also increases the final amount of repayable or loss of jobs. Contractors can also lose their licenses while people working in the federal department might be denied promotions. It is therefore advisable for students to pay loans in time. Additionally, the federal government should establish an all-inclusive system to ensure that all students are taken care of in case of a disaster. Therefore, in order to avoid huge debts, all stakeholders should play their part to mitigate the effect.
References
Douglas-Gabriel, D. (2020, April 17). Some federal student loan borrowers, locked out of the bailout, consider a risky move for relief. Retrieved from https://www.washingtonpost.com/education/2020/04/17/some-federal-student-loan-borrowers-locked-out-bailout-consider-risky-move-relief/?utm_campaign=wp_higher-education&utm_medium=referral&utm_source=rss
Friedman, Z. (2020, February 5). Student Loan Debt Statistics In 2020: A Record of $1.6 Trillion. Retrieved from https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#2de7af18281f
How the next president should fix America’s student-loan problem. ( 2020, February 20). Retrieved from https://www.economist.com/leaders/2020/02/20/how-the-next-president-should-fix-americas-student-loan-problem
Student Loan Default Has Serious Financial Consequences. (2020. April 17). Retrieved from https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2020/04/student-loan-default-has-serious-financial-consequences