With the recent upheaval in the presidential election, here are some important points to consider: Which candidate is better for your wallet? How do the two major parties plan to improve Social Security? What about health care? In America, access to health care has always divided the haves and have-nots, prescription drug prices can be out of reach, especially for the elderly, and a major health care crisis could bankrupt families.
What about state and local elections? Which of the names on the ballot reflect your economic interests or those facing economic insecurity?
Take the political fight over student loan forgiveness as an example.
According to the Education Data Initiative, about 43 million borrowers had $1.6 trillion in federal student loan debt at the end of the second quarter, with the average balance being $37,853.
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While a typical loan may not seem impossible to repay, when payments are spread out over several years and interest accumulates, it can become a burdensome liability for many Americans.
To encourage people to get a college education, a massive loan scheme was created, encouraging young people to sign up for loans that they ultimately could not pay as young adults.
When students couldn’t borrow enough, higher education institutions and lenders lured parents with the promise that loans were a good investment for their children. For many parents, this led to decades of student loan debt. I’m trying to pay off debt in preparation for retirement.
In some cases, students had neither a degree nor a decent job with which to pay off their debt. Loan servicers advised other students to postpone or even grant forbearance on their loan payments, resulting in ballooning debt through interest capitalization.
Deferment or forbearance allows borrowers to stop making monthly payments. Payments are available if you meet certain criteria, such as financial hardship.
If a borrower’s monthly loan payments do not cover the interest, the balance will increase. The unpaid interest is added to the principal and applied to the new, larger loan balance. In this way, the debt increases over time and the monthly payments can become unmanageable.
Interest rates are the bane of many financial aspirations, including building an emergency fund, buying a home, and investing for retirement.
In the short term, a payment deferral or forbearance may be helpful if you’re struggling to make payments and need some financial space. But in the long term, a payment pause can be tough as you end up paying interest on top of interest.
Some relief is warranted, with the Biden administration rolling out a massive debt forgiveness plan for millions of Americans who have taken out federal student loans.
One plan that may be a lifeline is a new income-contingent repayment program called the Save (Savings) Plan. Like other income-contingent repayment plans, Save calculates monthly payments based on a borrower’s income and the size of their family.
This program is groundbreaking in addressing the issue of interest capitalization.
With Save, the Department of Education doesn’t charge monthly interest that isn’t covered by a borrower’s payments, meaning that people who pay their borrowed amounts on time, even if it’s $0 per month, won’t see their loan balance increase with unpaid interest.
Interest Capitalization Borrowers have been suffering, but Save could provide some much-needed relief.
As of April, about 8 million borrowers were enrolled in Save. About 4.5 million borrowers were making zero monthly payments, and another million were making less than $100 a month, according to the White House announcement.
But the program is in danger of being overturned. Earlier this month, a federal appeals court temporarily blocked the Department of Education from fully implementing earnings-contingent repayment. A group of Republican attorneys general are leading an effort to overturn it, arguing that President Biden overstepped his authority.
Opponents of loan forgiveness say the relief is too costly and unfair to people who have paid off their loans.
“It is shameful that a politically motivated lawsuit brought by Republican elected officials is once again blocking payment relief for millions of borrowers,” Education Secretary Miguel Cardona said in a statement following the recent ruling.
Cardona said borrowers enrolled in Save will be placed in an interest-free grace period until all of this is resolved in court.
Let’s not forget that the Trump administration tried to eliminate the Public Service Loan Forgiveness program, which was created in 2007 to incentivize public service work. Borrowers’ loan balances are forgiven if they work for a qualifying employer, such as a government agency or nonprofit college, for 10 years and make 120 monthly payments.
But the program has been riddled with problems, and borrowers have complained they still haven’t had their loans forgiven after decades of making payments. Biden has argued for fixing, rather than ending, the program, which benefits public servants, social workers and teachers.
I vote with my money in mind, and I see the value in policies that guarantee fair wages, reduce poverty, fund food and housing assistance, and provide other safety net programs for people in financial difficulty who may need help because of job loss or illness.
