With the recent shake-up of the presidential race, it’s crucial that you consider which candidate will be better for your wallet. How do the two major parties plan to fix Social Security? What about health care? In America, access routinely divides the haves and have-nots, prescription drug prices can be out of reach — especially for seniors — and a major medical crisis can bankrupt a family.
What about state and local elections? Which names on the ballot reflect your financial interests or those who face economic insecurity?
Case in point: Let’s look at the political fight over student loan forgiveness.
At the end of the second quarter, nearly 43 million borrowers were carrying $1.6 trillion in federal student loan debt, according to the Education Data Initiative. The average balance stood at $37,853.
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The typical debt may not seem insurmountable, but when payments are spread out over years and interest accumulates, it can become a burdensome liability for many Americans.
To encourage people to get a college education, a massive lending apparatus was created that pushed teenagers into signing up for loans they ultimately couldn’t afford as young adults.
When students couldn’t borrow enough, institutions of higher learning and lenders sold parents on taking out loans, promising they were good investments for their children. For many parents, this resulted in decades of education debt; some are still trying to pay it off as they barrel toward retirement.
In some cases, students have no degree or decent job to show for the debt. Loan servicers counseled others into deferring their loans or placed them in forbearance, which then caused the debt to balloon because of interest capitalization.
A deferment or forbearance allows borrowers to stop making their monthly payments if they meet certain criteria, such as economic hardship.
Balances grow when a borrower’s monthly loan payments do not cover the interest. Unpaid interest is tacked onto the principal and then applied to the new, larger loan balance. This is how the debt grows over time and can make the monthly payment unmanageable.
It’s the interest that is the killer of many financial aspirations — building an emergency fund, buying a home or investing for retirement.
In the short term, a deferment or forbearance can be useful if you’re struggling and need a financial break. But, in the long term, the payment pauses can be brutal because you’re paying interest on top of interest.
Some relief is warranted, and the Biden administration has been rolling out large-scale debt forgiveness plans for millions of Americans who took out federal student loans.
One plan that could be the saving grace is a new income-driven repayment program — the Saving on a Valuable Education (Save) Plan. Like other income-driven repayment plans, Save calculates monthly payments based on a borrower’s income and family size.
This program is a game changer in addressing the problem of interest capitalization.
Under Save, the Education Department will not charge any monthly interest not covered by the borrower’s payment. This means people who pay what they owe — even if it’s zero dollars every month — will not see their loan balances grow because of unpaid interest.
Interest capitalization has tormented borrowers, but Save could provide much-needed relief.
As of April, nearly 8 million borrowers had enrolled in Save. Some 4.5 million borrowers have a monthly payment of zero dollars, and an additional 1 million have a monthly payment of less than $100, according to a White House release.
But the program is in jeopardy of being overturned. Earlier this month, a federal appeals court temporarily blocked the Education Department from fully implementing the income-driven repayment plan. A group of Republican attorneys general are leading the effort to overturn it, arguing that President Biden overstepped his authority.
Opponents of loan forgiveness argue that the relief is too costly and that it’s unfair to people who paid off their loans.
“It’s shameful that politically motivated lawsuits waged by Republican elected officials are once again standing in the way of lower payments for millions of borrowers,” Education Secretary Miguel Cardona said in a statement following the recent court ruling.
While this is all being sorted out in court, borrowers enrolled in Save will be placed in an interest-free forbearance, Cardona said.
Let’s not forget that the Trump administration tried to eliminate the Public Service Loan Forgiveness program, which was created in 2007 to encourage public service work. After 10 years of working for a qualified employer, such as a government agency or a not-for-profit university, and making 120 monthly debt payments, a borrower’s remaining loan balance would be forgiven.
But the program was riddled with problems. Borrowers complain that, after decades of payments, they still haven’t gotten loan forgiveness. Biden pushed to fix rather than cancel a program that benefits public servants, social workers and teachers.
I vote with my money in mind. I see the value in policies that ensure decent wages, reduce poverty, fund food and housing assistance, and provide other safety-net programs for people in financial distress. You may be a job loss or medical illness away from needing help.
