October 26, 2011
President Obama has announced a plan to cap student loan payments at 10 percent of income, yet it’s nowhere close to what organizations like Move On.org and some in the ‘Occupy’ movement are demanding.
With Americans’ student loan debts reaching 1 trillion dollars this year, there have been a number of noisy people calling for the federal government to erase student loan debts entirely in order to create ‘stimulus’ for the economy.
Most student loans are either direct federal loans or federally backed private loans. In the case of the later, if the government were to still meet its obligations to the private lenders, then that would amount to a bailout with money that was either taxed, printed, or borrowed and thus not ‘free’. If the government were to back out of its obligations to private lenders, then private lenders would wisely stop working with the government and stop issuing student loans or tighten their standards when awarding them. That wouldn’t be bad in the sense that it would give the free market a chance to come up for air, however if those in debt– for whom there are less and less jobs available– defaulted on these loans we could be looking a brand new crisis (on top of others) much like the subprime crisis.