I suggest an interest holiday, or a switch to monthly compound interest rather than daily, on private student loans which are subject to regulation by the federal government. I also suggest repeal of the 2005 provision which made private student loans non-dischargeable in bankruptcy. The reduced debt loads will encourage aspiring entrepreneurs to take more risks.
Likely entrepreneurs are often young, educated professionals who cannot find work in their field, given the shrinking job market for white collar fields such as law, and who have comparatively fewer family obligations due to their age. Unfortunately, this is the group most likely to be weighed down by six-figure student loan debt.
IBR allows aspiring entrepreneurs to lower their fixed monthly costs on federal student loans. However, the rules on private student loans are extremely onerous. Interest compounds daily - debtors pay interest on the interest, and that additional interest is capitalized and added to principal. The loans operate like high-interest credit cards. It is relatively common for debtors to have paid an amount in interest that is equal to or greater than the original amount borrowed, but still have not reduced principal by more than 20%. My own loans have been in repayment three years, with no late payments, and I have already been charged interest and fees totaling an amount equal to 40% of the original amount borrowed. Private student loans cannot be discharged in bankruptcy, which further inhibits risk-taking behavior on the part of debtors.
An interest holiday, allowing debtors to pay down principal, an a return to discharge of loans in bankruptcy (as has been proposed by Senator Al Franken) would allow the group of citizens most likely to risk entrepreneurship, young professionals, with the means to do so.
Currently, a law school graduate who wants to open his own practice, or an MBA graduate with an innovative idea, will risk serious and lifelong financial consequences if their business fails in the first year, disrupting income. Deferments are available if income is disrupted, but these deferments allow interest to compound at staggering rates, causing monthly payments to double or triple when payments resume; they are also available for only limited periods of time. Further, co-signers, usually parents, can be harassed and even sued if the loans enter default. Since the majority of businesses fail in the first year, fewer likely entrepreneurs are willing to risk their financial future, and their parent's income in this way.
An interest holiday, or interest that compounds monthly, rather than daily, as well as the possibility of discharging private student loans in bankruptcy (a method which was available until 2005) would therefore allow for more risk-taking behavior from the people most likely to take those risks, but who are now inhibited by fear of lifelong credit issues and the impact their debt can have on family members.
Liz de Bagara
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