How can people make payments for 20 years on school loans and barely make a dent in the principal? How are those loans different than a mortgage?
In: Economics
The first big issue is people can take out massive loans for fields that stand no chance of ever paying then off. Low paying careers like art or hospitality can take out the same loans as engineers. But then they graduate making half The salary.
The second big issue is student loans start accruing interest IMMEDIATELY. This means while you’re in school learning, the loans are already growing. You don’t have to make payments since you’re in school, but that doesn’t stop the interest from making them grow. So when you graduate you’re already behind. Fun.
Luckily there are some ~~shitty~~ tools we can use to make things ~~worse~~ easier.
The first is deferment. You can pause payments after graduating when you get your first job being underpaid as a college graduate. But just like in school, just because you’re not paying on the loan doesn’t mean the loan isn’t accruing interest. So they get even bigger. Deferment can last for a couple of years.
Then there’s income based repayment. If you’re income is under a certain level they will reduce how much you need to pay on the loans so you don’t default. That’s great, but again, the loans still accumulate interest, except now you’re paying less on them. So they grow more than your payment shrinks them, so they get bigger.
There’s also a regular recent graduate payment reduction program for people that make too much to qualify for income based, but can’t afford the loans for other reason. The payment reduction isn’t as much as the income based option, but still enough that the interest grows more than the payment.
If you didn’t notice there’s a pattern. The interest never stops making the loans grow, no matter how far behind you get or how low your income is.
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