Will the Real Student Loan Debt Problem Please Stand Up?

Much of the student loan debt discourse is absolutely clueless.
People who complain about student loan debt forgiveness don't realize that the former students with the debt are in a rigged game reducing them to debt slaves for the rest of their lives.

I think many of the people who are ranting and raving about student loan debt forgiveness have so oversimplified the issue (thanks, right-wing jackasses!) that they’re unable or unwilling to actually understand what’s at stake here.

The problem isn’t “people who refuse to pay their student loans getting a handout” (you can’t fail to pay on your student loans or they’ll garnish your wages) or “people just wanting to get their education and not pay for it” ($10,000 doesn’t even cover the interest payments on most student loans) or “people getting ‘weak degrees’ and wanting everyone else to pay for it” (there’s no such thing as a “weak degree”–STEM degrees can teach you to logic things through, but arts & humanities degrees teach you how to predict the possible consequences of actions based on an understanding of history and human nature, and society needs a balance between the software engineer mantra of “move fast and break things” and humanities scholars asking questions like, “is this AI programmed to actually make equitable decisions?” or “what would be the consequences of starting a war with China?”)

The problem is what’s called capitalized (or compound) interest, as opposed to simple interest. Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Believed to have originated in 17th-century Italy, compound interest can be thought of as “interest on interest.” It will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount. (Source: Investopedia)

Mortgages and car loans are examples of simple interest: The total interest you pay is based on a payment schedule of a fixed number of years (a five-year car loan, a 30-year mortgage), and these payments are amortized, meaning that at the beginning of the loan period, your payments are divided so that they pay more of the interest than the principal, and as you move through the loan period, the balance shifts more and more to the principal (the amount of money you originally borrowed) until, at the end of the loan period, you’re just paying the principal. The total amount of interest you pay over the course of the loan period never changes. This means that even with an amortized payment, the total amount of money you owe on the loan will never change.

When I took out student loans for my college education back in the late 1980s and early 1990s, student loan debt was based on simple interest: I  knew how much I owed and how long it would take me to pay it off if I made my payments regularly. The loans I took out were Perkins and Stafford loans, federally guaranteed student loan programs that allowed people to borrow money for college and then pay it off.

But once the banks started getting involved, everything went to hell. Banks are motivated by profit, not by vaguely humanitarian interests like the desire for an educated populace, and they don’t give a damn who they destroy in the process. As long as they’ve got their money. And just to clarify here, my comments about the banks should absolutely not be construed as an anti-Semitic dog-whistle. If you hate Jews, you do not have an ally in me! Almost all of the bankers I’ve met have been WASPs. I just happen to think that banks shouldn’t be in the business of screwing financially naive people like recent high school graduates. Doing so makes them no better than the con artists who try to bilk old people out of what meager savings they may have.

However, most, if not all, student loans are based on compound interest: That is, the amount you owe rises every month based on the total principal owed plus the amount of interest still owed. Are you catching this? What this means is that a student may have a payment of, say, $400 a month on their loan. Because the amount the student has to pay off increases every month because of “interest on interest,” it’s very likely that this $400 a month won’t even cover the cost of the interest on the loan, so instead of actually paying down their student loan debt, they’re basically running to stand still–or, more accurately–running and running but moving backwards anyway.

Compound interest is also called capitalized interest. According to studentaid.gov, “interest capitalization occurs when unpaid interest is added to the principal amount of your student loan. When the interest on your federal student loan isn’t paid as it accrues (during periods when you’re responsible for paying the interest), your lender may capitalize the unpaid interest.

“Capitalization increases your loan’s principal balance, and interest is charged on the new, larger balance. Your monthly payment may also increase. Unpaid interest is generally capitalized under certain conditions, such as following grace periods and deferments of unsubsidized loans, following forbearance on any loan, or if you voluntarily leave certain repayment plans.” (Source: StudentAid.gov)

So, basically, these kids were sold the idea that college is the only way to a better life but given no financial education at home or at school to be able to figure out what they’re getting themselves into with student loan debt. Then private banks got involved in student loans and capitalized interest became a thing. If Jesus came back to earth today, he’d be freakin’ flipping tables on these usurious moneylenders in the temples of higher education.

(Originally published on JaneA’s LinkedIn page)

Leave a comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.