Hopeless. This is how many individuals with student loan debt describe their situation. Large swaths of the American public – approximately 45.1 million borrowers – have student loan debt, so it is not surprising that the national discussion has turned to whether and how to help them. The discussion, however, consistently frames the problem on a macro level. Lawmakers and political pundits frame the problem in terms of the amount of outstanding student debt – $1.6 Trillion nationally and an average of $37,584 average individually. However, reducing the overall amount of debt is not necessarily the answer.
By focusing only on the overall amount of student debt, we are ignoring the problem that affects all indebted persons on an individual, human level: individual monthly payments. After all, when the majority of student loan debtors are between ages 25 and 49, their monthly debt payment is what limits their ability to rent an apartment, buy a house, purchase consumer goods, go out to dinner, pay bills, and meet life’s everyday expenses. Their debt prevents them from contributing to the economy at large. It is more likely the size of the monthly debt payment – and its negative impact on monthly cash flow – that causes so many people to feel stuck and, consequently, “hopeless.”
Compounding the problem, most student loan repayment options require payments of a fixed monthly amount for the entire repayment term. When someone selects a standard or consolidated repayment term, they agree to make the same monthly payment, each month, for the next 10, 20, 25, or 30 years. Additional payments toward principal have no effect on an individual’s fixed monthly payment.
Take “Kevin,” for example. Kevin graduated from a four-year college in 2020. He left school with $36,520, which is roughly the average amount of debt for borrowers who received federal loans. Kevin selected the standard repayment term of 10 years, and his fixed monthly payment is $378, based on the 4.53% interest rate for federal undergraduate loans in 2019-2020. Kevin’s monthly payment will be fixed at $378 until his $36,520 debt is paid in full. Even if he pays an additional $1,000, $5,000, or $10,000 toward the loan principal, his monthly payment will remain at $378.
And then there is “Sidney.” She earned a graduate degree in 2020, and her total student debt is $82,800, which is the average student debt for graduate students who received federal loans to attend undergraduate and graduate school. Sidney combined her loans into a “consolidation loan” and selected a 20-year repayment term. Her monthly payment is $597, based on the 6.08% interest rate for federal graduate loans in 2019-2020. Her payment will be $597 for the entire repayment term, regardless of whether she makes any additional payments toward the loan principal.
Kevin and Sidney’s situations are common examples of why so many with student debt feel “trapped.” They feel that no matter what they do they will continue to be paying off their loans for the most – or even the remainder – of their lives.
When viewing the problem in the context of monthly debt payments – where the average payment is $393 per month – a potential solution emerges that involves “unfixing” monthly debt payments. If monthly payments are “unfixed,” millions of borrowers will have a path toward increasing their monthly and yearly cash flow, while also maintaining the option to pay off their loans in a shorter time period. More specifically, student loan repayment programs should be modified so that when a borrower makes additional payments toward the loan’s principal, the monthly payment obligation is reduced for the remainder of the repayment term.
Presumably, “unfixing” monthly loan payments could be implemented more directly at the federal level, as most federal loan programs are administered by the U.S. Department of Education. If so, then this change could immediately help millions of people, since the federal government has issued 92% of all outstanding student loan debt to approximately 43 million borrowers.
Using Kevin and Sidney as examples: If either of them paid a single lump sum or increased their monthly payments for a brief period, their future monthly payments would decrease. Their “unfixed” payments would decrease over time, which would give them a permanent cash flow increase. They would still have the option of making additional payments toward their loan principal if their goal is to pay off their loans in a shorter time period. However, unlike the current repayment options, their minimum monthly payment would continue to fall, providing them with extra cash flow when needed.
Under this proposed measure, borrowers with much higher student debt, such as law school graduates ($160,000 average), medical grads ($200,000 average), and dental grads ($292,000 average) would realize more savings and larger monthly cash increases. Individuals in the 30 to 44 age group, who account for 49% of all outstanding student debt, would also gain considerable relief since their current remaining balance is likely to be substantially lower than when they started their loan repayment. The additional cash generated by this option would have a real and positive impact on millions of peoples’ ability to cover their expenses – from digital streaming subscriptions to doctor’s office co-pays.
By “unfixing” monthly student loan repayments, millions of borrowers will have an opportunity to immediately and permanently increase their monthly cash flow. Regardless of its source, every extra dollar paid toward loan principal will lower their monthly payment by some degree. Although many people would still have student debt…they would not be “hopeless” anymore.