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Should the US Reform the Student Loan System?


Perhaps we should make our student loan system more Australian.

Self-employed people are responsible for withholding their own taxes and paying them quarterly, and tax problems are extremely common among freelancers. W-2 employees hardly notice that they're paying taxes. (I once asked my brother how much tax he paid, and he said, "Zero." He meant that's how much he owed in April.)

Yes, you can and should set up automatic payments for your student loans, but it's still not the same. You'll get into trouble when you change jobs or change banks.

This is one instance where it's to your benefit to have the government's hooks in you: since your student loan payments are going to the government, and you're punished harshly for failing to pay, why don't they make it easy?

We're not talking about a scary government takeover. The federal government already owns the vast majority of student loans and already collects taxes via the IRS. Putting them together would make the repayment system more sane, fair, and effective.

One more thing

True, not all student loan payments are owed to Uncle Sam. But private student loans account for less than 10% of student loan originations, and they're among the worst kind of debt: high interest, ineligible for IBR, and still not dischargeable in bankruptcy.

The government can and should nationalize private loans and bring them under the federal system or, at the very least, make them eligible for bankruptcy. Private loans rarely make the difference between being able to attend college or not, because the neediest students are eligible for the most grant and scholarship aid, plus subsidized federal loans.

What I'm talking about here is a small reform. It won't solve the problems of students taking on too much student debt or attending colleges they can't afford.

But it would meaningfully improve the lives of many people facing down student loans, at a minimal cost to the government, and it's not a new idea: it's been tested in the sun-baked laboratory called Australia.

Editor's Note: This article by Matthew Amster-Burton was originally published on MintLife.

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