What to do about student debt

A turning point depends on more than Biden’s relief package.

One of the hottest topics in personal finance right now is the prospect of student loan forgiveness. The proposed Biden plan would wipe out up to $20,000 in federal loans for some borrowers earning less than $125,000 a year or $250,000 for spouses. It could affect more than 40 million people. The package is currently on hold while some legal challenges unfold, but other initiatives have made it clear that student debt is a top priority for the current administration.

All of this means that 2023 will be a year where we see unprecedented action to address the student debt burdening Americans. The Biden administration’s new reimbursement plan is the strongest action this administration has taken and could have the biggest impact over the next decade. However, although much emphasis has been placed on government activity as a panacea, it is only a short-term solution leaving the structural aspects of the debt problem untouched. More action is needed from more actors to have a real impact. Here’s what we need to understand about student debt and what needs to happen next for 2023 to be a truly pivotal year.

Above all, it is important to realize that student loan debt is the most unique and complicated form of debt in the United States today, accumulated by the youngest borrowers. It soared to $1.75 trillion, according to the Federal Reserve, surpassing credit card and auto debt and averaging about $38,000 per borrower.

Second, student loan debt is not structured like any other consumer debt or loan. Unlike other types of loans, student loans are effectively unrepayable in bankruptcy; Because they are held by the federal government, student loans are treated differently.

Third, the average student borrower has between four and ten loans, each with their own interest rates, repayment plans, and terms, which can be overwhelming and incredibly confusing.

While the Biden administration’s proposal is good news for some borrowers, the one-time cancellation does not address the underlying and under-discussed issues related to these three areas: hard-to-manage payments, lack of transparency, and financial literacy. .

To manage these issues and move towards real change, we need:

Engagement of employers of all sizes. Companies should offer loan repayment assistance, signing bonuses that can be applied to student loan repayments, loan management tools, and ongoing training for employees.

Similarly, debt repayment programs tied to 401(k) accounts would help support current and future financial health. Clear communication and education around these benefits is key: there’s nothing worse than having a fantastic employee program if the employees themselves don’t understand or recognize it. Understanding repayment options makes all the difference for borrowers.

Service provider to enable precision payments. Since borrowers often have multiple financial institutions, banking apps, PFMs, etc., they need to offer the tools to allow their customers to understand their student debt, make accurate payments, and explore repayment plans tailored to their needs. their needs. Ensuring that the payment is going to the right loan and the right servicer is critical to repayment success. Unfortunately, borrowers cannot simply send a check to a loan servicer and expect payment to be directed to the appropriate loan, ideally the one with the greatest impact on repayment. Precision payments will be a game changer for the industry.

Resolve unnecessary confusion. It goes without saying that borrowers deserve to receive accurate, consistent, and timely information, especially when leaving school or moving to a different payment plan. Although this seems obvious, it is not a given in the industry today.

As we face billions of dollars in student loan debt in an era of rising costs, we don’t need unnecessary confusion. Student debt isn’t – and shouldn’t – be that complicated. We have the ability to support better, faster and clearer refunds. This would allow Americans to manage student loans, the first and greatest responsibility many of them bear, from a position of strength, preparing them to successfully move forward in their financial lives.

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