Written By Travis Hornsby, CFA®, CFP®
It’s no secret that student loan debt affects people’s lives — and not in a good way. The ever-increasing student loan debt is a major cause of frustration and stress for many college graduates in America.
With the crippling financial burden that it creates, it’s possible to feel like you’re in over your head.
Some people feel they’re forced to delay major life events such as getting married or having kids due to their student debt burden. Others believe they’re forced to take jobs that they hate or live in places they don’t like just to repay their debt.
Financially, student loan payments can take a significant chunk of monthly income. This can reduce your disposable income and leave you unable to invest, save for retirement or make large purchases such as buying a home.
Brief history of debt burdens
Having a debt of any kind has been a cause of stress and anxiety throughout history. In the 1500s and 1600s, debtor’s prisons were used to punish those with unpaid debt. Even worse, debtors, and sometimes their entire families, were sold into slavery because of debt.
I know what you’re thinking: how is this supposed to make me feel better about my massive student loan debt?
Luckily, we don’t have debtor’s prison and you don’t have to worry about becoming a slave or getting murdered because of student loan debt in today’s world.
But I know that student debt can be pretty terrifying, especially because of how complex it is.
Student loan debt is complex (but it’s not all bad)
It’s easy to get hung up on the massive student loan burden that you have and forget that student loans have come a long way in America.
In the past, student loans were only accessible to people with good credit — which was limited primarily to white men. It excluded large groups of people, especially minority groups and people of color.
But with the government’s intervention and involvement, student loans are now accessible to a diverse group of college students. This is a good thing because many previously disadvantaged people and people from low-income backgrounds can now pay for a college education.
Why student loan interest isn’t the real problem
Even though it seems painfully high, the 6% interest rate on student loans is pretty fair. Bear in mind that student loans are unsecured debt. But the government backs federal student loans, lowering the risk and resulting in a lower interest rate.
If private financial institutions gave the loans, the interest rate on student loans would likely match, or even be higher than, credit card interest rates.
The interest rate for federal student loans is as low as it is because the government subsidizes it with billions of dollars. What’s more, the interest grows at a simple rate of interest, instead of a compounded rate of interest.
If you're going for forgiveness and are on an income-driven repayment (IDR) plan, the interest that’s charged on your loan doesn't matter at all. Yes, the interest might determine how big your tax bomb will be on forgiveness, but it’s never as big as people think it is.
Because of the student loan complexity, people tend to overestimate how much interest they have accumulated instead of focusing on the real problem — which is the arbitrary raising of tuition fees by the rogue universities.
In other words, it is not the interest rate that is high. Rather, it is the cost of higher education that is ridiculously high. Even if the government got rid of the origination fee and lowered the interest rate to 3%, it would make very little difference without fixing the high cost of education.
You would still have a massive debt. The real issue that needs to be addressed is the cost of college education. You shouldn’t have to pay $500,000 for a dental degree. That’s absurd.
3 beneficiaries that profit off of student loans complexity
There are a lot of industries that profit off of how complicated student loans are. Before I get into the three primary beneficiaries of student loan complexity, I need to level with you: Student Loan Planner® benefits from the complexity of the student loan system.
We help people understand their student debt situation and provide custom student loan repayment plans, and we make a profit by offering that service. It’s similar to how a CPA would make a profit from preparing a complex tax return statement.
We have nothing to do with making the system complex, but we’re here to help you understand it in a way that can benefit you in the long run.
1. Universities
The top beneficiaries from student loan complexity are the universities.
Universities know that they have you captive once you have borrowed for your first year. You’re essentially stuck. They can raise tuition as much as they want, and you will keep paying it and accumulating student debt to complete your degree.
There really should be some regulation about how much schools can charge and how much they can increase tuition over a set period of time.
2. Employers and big hospital systems
Another big group that benefits from the complexity of student loans is employers such as dental service organizations. These massive corporate organizations have taken over what used to be a “mom and pop” small dental practices with single-person owners running the show.
Now we see massive dental service organizations that might own 50 or 100 or 1,000 dental practices and they need an easy to acquire labor force to fill all of their practices.
So, how do they convince professionals to give up their independence and become employees? How do you get them to stay long term? Well, if you have a high student loan burden, you’re more likely to be risk-averse and less likely to take on a practice loan.
These organizations benefit from graduates having high student loan burdens. The high student loan burden forces professionals to take jobs instead of taking a risk and starting their medical or dental practices.
Big hospitals have similar strategies. They hire professionals who feel like they need a guaranteed income to be able to pay for their student loans and put food on the table.
Plus, Public Service Loan Forgiveness (PSLF) favors these hospitals because a physician who’s attached to a hospital is eligible for PSLF, while a physician who owns a small private practice is not.
This encourages people to seek employment instead of setting up their own businesses, which benefits employers and big organizations.
3. Banks and student loan servicers
Banks that offer private loans also profit off the system. The rising cost of tuition means borrowers are taking out bigger loans and paying more in interest as they work to pay them off.
Private student loans aren’t generally able to be discharged in bankruptcy, so that’s another way they benefit.
And let’s not even talk about the federal student loan servicers. These people are only kept in employment because of the massive PSLF records that they hold. They do a fairly poor job overall. But then again, they have to submit a low-bid contract since that’s what the government asks them to do.
The frustrating student loan system
Student loan complexity doesn’t have to be scary or frustrating. Some people profit from the student loan industry. It's messed up, and it shouldn't be this way.
But once you understand how it works, you can start thinking about how to overcome student debt. It doesn’t have to affect your big life decisions like having a family, buying a house or whether or not to take that dream job.
At the end of the day, student loan debt should not impact you negatively. It should just be a thing that exists and something you have a plan for. Then, you can put in the back of your mind and live your best life.
If your loans are causing you anxiety, we can save you a lot of money. Book a consult with a student loan expert to get a custom strategy to repay your student loans.
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