Are Student Loans the Next Mortgage Crisis?
Shelia Hair was the head of the Federal Deposit Insurance Corporation from 2006-2011 and she was one of the few officials who warned of the 2008 mortgage crisis. She is now speaking out about student loans and her radical solution.
The solution involves funding college by letting students trade away a portion of future earnings for financial support now.
Hair has since taken over as the president of Washington College in Chestertown, MD and is seeing the parallels between the rise in student loan debt and the mortgage bubble that sparked the Great Recession. She explains that the debt load students have to burden can have “tragic consequences.” Adding, “it deters kids from starting businesses. That drags down economic activity. It’s the same dynamic as the mortgage crisis.”
Her solution to the problem is called “deferred tuition” or “income share agreement” (ISAs) which allows an individual to receive a fixed amount for college and in return, they agree to pay back a percentage of his/her income for a certain number of years. “It automatically adjusts with the student’s income, so it si always affordable. It relieves financial distress,” explains Hair.
She believes this is better than taking out a high-interest private loan or a parent loan because graduates who lose their jobs or take low-paying jobs right out of school won’t be pressed for payments until they can afford them.
Last fall, Purdue University became the first in the country to launch and experiment with one of these programs. Their “Back a Boiler” fund has given roughly 150 upperclassmen funding from the school in exchange for about 3% to 5% of their post-graduate income for seven to ten years for every $10,000 they receive. The rates and payback period factor in the student’s year and major.
Jason Delisle, a resident fellow at the American Enterprise Institute, points out the downfall of the ISAs. He notes that they tend to be more expensive for borrowers in the long run as federal loan interest rates are generally below 4%, and the income-based repayment programs have proven extremely helpful for repayment.
Students are only allowed to take out between $5,500 and $12,500 a year in federal student loans depending on their age and year.
Often students need more than this a year to afford college as a typical student at an in-state public school spends about $18,000 a year.
The additional funding needed generally forces students to have their parents take out a parent plus loan or they themselves have to take out a private loan. ISAs would act as a substitute for these two options. For most people, ISAs will be more flexible and cost effective than loans, however, for those who land high-paying jobs upon graduation, an ISA would be a more expensive option.
We will be keeping an eye on the ISAs as more information comes out about their effects on the economy and students. If you’re struggling to pay on your loans or need some relief, call today and speak with one of out loan specialists 800-940-8911.