When it comes to student loans, some of the most frequent issues that plague both lenders and borrowers are delinquencies. A person becomes a delinquent when they fail to make multiple payments on their student loan debt. According to the United States Department of Education, the late payment rate of student loans for individual borrowers can reach nearly 40 percent.
What this has done is create a system that is unsustainable for everybody involved, from the students who are taking out these loans to attend college to the financial institutions that are not making their money back when people cannot make their payments on time. The number of distressed borrowers in the U.S. — those currently in default — is nearly 50 percent of the total.
So what can be done to help ease this situation for all sides of the equation? A loan portfolio where half of all people, and there are 40 million American citizens with student loan debt, are in trouble or on the line is in clear need of adjustment and restructuring. Concrete actions need to be taken to help this part of the economy pick back up.
Here are a few things that can be done:
- Permit partial and full prepayments: Many student loan debt payment cycles are scheduled to last for decades, but there is no reason why that needs to be. Some people will find themselves in the position where they can pay back their student loans more quickly, and should be permitted to do so without penalty. This will ensure that the borrower has to pay less in overall interest rates during their lifetime.
- Restructure loans for terms of up to 20 years: If people are offered longer repayment plans, this will make them much more affordable in the long run than simply trying to adjust the interest rates. Giving borrowers more time to pay off the debt will also be good for financial institutions, as it ensures they will see the money lent out come back to them at a more evenly distributed and on time rate.
- Student loans should be discharged in bankruptcy: Currently, student loan debt is not forgiven in the event that a borrower declares bankruptcy due to their ongoing financial problems. This law should be changed, and loans should be relieved if a person cannot afford to make any of the payments. This will offer necessary relief to those who are financially struggling, which will also motivate private lenders to come up with a tangible solution to the problem.
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