Forum Discussion 1 Should students tuition loans be forgiven

Forum: Discussion 1: Should students tuition loans be forgiven or the interest rate reduced to the rate of the multi- corporation?

Solution

I think students tution loan interest rate should be reduced.

Nowadays education is just like investment. You need to pay a huge sum for the tution fee and say after 4-6 years or sometimes more or less, you would be able earn money and hence just like any other business, there should be a interest rate applicable to education loans which should be beneficial to both the parties, bank and the student.

This private market failure is one reason why government plays an important role in lending for education. Governments, through the income tax system, have the unique ability to both measure and collect income.

But the main thing is that the interest rate should be designed in such a way that it should be easily affordable and also a easy income for the banks. Or at least, Taxpayers would seek neither to make money from these loans, nor subsidize them.

Can lower interest rates reduce loan defaults? In the standard, mortgage-style payment system, a lower interest rate reduces the monthly payments required to cover principal and interest. In this payment model, a lower interest rate could make loan payments more manageable for some borrowers and thereby reduce defaults. The effect is quite small, however, since loan payments are largely determined by principal, rather than interest. The ten-year payment on a $20,000 loan is $204 when the interest rate is 4.29%, and drops just twenty dollars (to $184) if the interest rate is cut to 2%. For a seriously distressed borrower, cutting the payment twenty dollars is unlikely to make much of a difference.