Federal student loans: Predatory or fair financing?
Dishing out dollars to the old man in Washington, huh? That's the question that's been bugging my brain. Do I Venmo Uncle Sam, and leave forgiveness as a distant dream?
This lyrical thought sprang to mind as I delved into the world of student loan forgiveness. As I delve deeper, speak to experts in the field, and crunch the numbers, I've come to a startling realization: Federal student loans have more in common with the sneaky mortgage products of the 21st century than you might initially think.
- Credit scores? Who needs 'em? Nearly every other type of credit takes your credit score into account to determine eligibility and set the interest rate. Federal student loans, however, don't give a hoot about your credit score[1].
- Poor credit? No problem, kiddo! With most loans, a low credit score means a hard pass or limited borrowing capabilities. But with federal student loans, a low income often equates to a higher loan eligibility[1].
- Till after graduation, we shall wait Most loans expect repayment to commence as soon as you receive your loan funds. Federal student loans, however, are on a deferred repayment plan, granting you a bit more breathing room[1].
- Your paycheck will determine your payment Traditional loans require you to agree to a fixed monthly payment when signing the dotted line. Federal student loan payments, however, might vary based on your post-graduation income[1].
Now, you might be wondering, why does it all matter? Let me fill ya in.
Federal student loans are essentially the credit world's version of a yo-yo. My last encounter with such a financial contraption was during my stint as a mortgage originator. Back then, loans that didn't require income verification were considered a piping hot mess, not unlike predatory mortgage products. A popular solution back in the day was "principal forgiveness." Sounds familiar, huh?
The Burning Question of the Month: Is student loan forgiveness a red flag that the loans are predatory?
This question is as loaded as a gunpowder keg, so let me set the stage. In response to the housing crisis, regulators took a close look at a specific loan product: the no-income, no-asset loan[2]. These babies had no down payments, didn't require income verification, and were a fast track to debt town for many borrowers.
Similarly, federal student loans can be obtained without a credit check. In fact, since federal loans are needs-based, a low income might even help you borrow more. The lenient lending standards make it all too easy to cover soaring tuition costs. And as we're emerging from the payment pause, the cold, hard reality of repaying your student loans is making itself known to millions of borrowers[2].
Who's to blame for the student debt crisis?## Time to talk turkey about student loan payments
Following the dust settled by those sketchy mortgage products, a key takeaway was a renewed focus on verifying a borrower's ability to repay the loan. Given the resemblance between no-doc mortgages and some student loans, maybe it's high time for a discussion about student loan repayment plans with student borrowers.
Since payments on federal student loans are often deferred until after graduation, it's easy to kick that repayment can down the road. Just say to yourself, "I'll figure out how to repay it when I'm done with college." So, if you're considering borrowing for school, here are a few questions to ask yourself:
- What's my realistic post-graduation income? Don't be swayed by the top end of your future career's pay scale. Stick to the average earnings for a more accurate idea of your repayment obligations.
- What will my monthly payment look like? Crunch the numbers with a student loan calculator. Be realistic about your income-based repayment capabilities, but don't bank solely on this safety net.
- Focus on budgeting for repayment instead of banking on federal loan perks. Often, the argument against private student loans is that they lack the protections of federal student loans. But perhaps the focus should be on creating a solid repayment plan, even if it requires making payments while you're still enrolled in school.
- Get prequalified for private student loans. Traditional advice is to apply for federal student aid first, but before diving headfirst into federal loans, it's wise to get prequalified for private loans to assess your ability to repay.
- Schedule yearly check-ins with a financial advisor or counselor at your school. This regular touchpoint can help keep your repayment plan top of mind.
Is it goodbye to student loan forgiveness?## The bottom line from your BFF (Best Financial Friend)
As of April 2025, over 5 million federal student loan borrowers were in default, with another 5 million teetering on the edge[3]. What brought us to this point?
The original intention behind student loan forgiveness was to offer financial relief to those pursuing public service careers or seeking aid due to financial hardship or fraudulent college schemes. However, it seems that too many students are borrowing money for college, assuming they can repay the debt without first considering their repayment obligations[3].
Betting on loan forgiveness with no solid repayment plan is neither smart nor responsible. Before taking on a mountain of debt, be sure to understand your repayment obligations, consider your realistic post-graduation income, and have a plan post-college. Otherwise, your first taste of credit and debt could leave you in a hole.
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- Given the similarities between student loan forgiveness and the mortgage products of the 21st century, one could question if the lenient lending standards make student loans predatorily designed.
- In the quest for financial wisdom, understanding the post-graduation income and creating a solid repayment plan for student loans is crucial to avoid falling into a deep debt hole.
- When considering student loans, it's wise to get prequalified for private student loans and schedule yearly check-ins with a financial advisor or counselor to ensure a well-informed repayment plan.
