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Student Loan Interest as Bad Social Policy

So outstanding student loans in the US are about $1.5 trillion. Most are at 6-8% interest, and are federally guaranteed. Meaning whoever holds the loan cannot lose money (if the loan isn’t paid by the borrower, the Federal government makes the lender whole). Since offsetting losses is the whole purpose of interest, this is pretty much a $90 billion per year federal give-away to big banks. They get to collect the interest as profit, on loans that can’t go bad. Meanwhile corporate junk bonds are at 5% interest. That is, the riskiest corporate borrowers pay less than students whose loans are federally guaranteed.

And that is what is wrong with the US today. We’ve got $90 billion per year to pay to banks for doing (at this point) pretty much nothing. Yet low- and middle-income college students have to pay for their own post-secondary education, which can only be done by loans. And then they are charged 6 or 8% per year for the privilege.

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