College Finance: Why Student Loans Should Be Pay as You Go

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Do federally subsidized loans keep students in school -- and accumulating debt -- longer? Today, students who qualify for federally subsidized loans have an incentive to stay in school: Their loans don't accrue interest -- nor do they have to pay interest -- on their loans while they're enrolled. But that could change. In a draft report released last week, President Barack Obama's national deficit panel proposed ending the in-school interest subsidy on school loans.

The proposal would save an estimated $43 billion over a decade. Predictably, the higher-education lobbyists oppose ending the subsidy, and so do advocates for student borrowers.

While I consider myself an advocate for student borrowers, I wholeheartedly support ending the subsidy -- and even taking it a step further. I think that we should end in-school deferment periods on student loans and also require students to make full payments on their debt while they're still enrolled.

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Here's why: Under the current system, students sign up for loans starting their freshman year, then don't give any thought to making payments on them for at least four years. That's not a recipe for prudent, long-term-oriented financial decisions. A delay of 1,500 days between borrowing the money and figuring out how to start paying it back makes it too easy to make repayment a "figure it out later" problem. That's why more than a third of student borrowers are struggling to make their payments and the long-term default rate on federal loans -- the least risky loans -- is more than 20%.

If the federal government starts requiring students to begin paying off their loans as soon as they borrow the money, we might see the birth of a newfound prudence in borrowing. Students might opt for cheaper schools, take part-time jobs to avoid loans and maybe even make more of an effort to graduate on time.

Zac Bissonnette'
s Debt-Free U: How I Paid For An Outstanding College Education Without Loans, Scholarships, Or Mooching Off My Parents was called the "best and most troubling book ever about the college admissions process" by The Washington Post.
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