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
Student loans are very different from home loans. One type of student loan sets your payment as a fraction of your salary. The concept is that as you gain experience your salary increases, and eventually you’ll pay off the loan.
This doesn’t happen with home loans, because the house itself can depreciate if you don’t take good care of it. Student loans are secured by your knowledge, and that can’t depreciate. There are also laws that prohibit the discharge of student loans in bankruptcy, so the bank can hope to collect money from you forever. With a home loan, the bank can foreclose and sell the house, but there is no way to get the knowledge out of your head.
In general, student loans are a very sticky sort of thing, and the banks essentially want you to pay them forever. Alas, some students (and their parents) don’t really appreciate what they are agreeing to. People who are the first person in their family to go to college are, sadly, excellent candidates for the bank to take advantage of.
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