If you step back and take in the wider view, you can see there is a business model for enslaving people without enough money. It works like this, you offer to give them money for something they want, even though they can't really afford it, and then you can add penalties and interest to garnish their future income until they die.
This is the business model of payday loans, you offer a loan until pay day, but they never have enough money so you "roll over" the loan and you're always owed interest. You create a situation where not only will the person never be able to pay you back you can milk them for anywhere from 5 - 50% of any money they manage to acquire. You have effectively enslaved them.
That was the same model used in the sub-prime mortgage crisis except there are two problems with sub-prime mortgages, one was they are usually no-recourse so you can just hand over the keys to the house and "pay them off" and they are dischargable in bankruptcy while the primary residence is protected.
So these leeches have turned to student "loans." Not dischargable in bankruptcy, you pay until you die. Check. At risk population that feels they have to have a college degree? Check. A set of 'for profit' schools willing to set aside any sort of moral principle so that they can transfer money to themselves? Check.
The predatory lenders stepped right into that ideal environment and have been convincing people left and right that things will be so much better and all they need is "education" and its easily within reach because they can "finance it."
That's a very important distinction, because in a lot of states, social security and other government support benefits are verboten from garnishment. The only two federal garnishments against social security that can occur are for federal taxes, and federal student loans.
Below $54,126 Nil
$54,126–$60,292 4%
$60,293–$66,456 4.5%
$66,457–$69,949 5%
$69,950–$75,190 5.5%
$75,191–$81,432 6%
$81,433 - $85,718 6.5%
$85,719–$94,331 7%
$94,332–$100,519 7.5%
$100,520 and above 8%
But yes, I really like the Australian system. The fact that's its integrated with the tax system means there's no other monthly payments to worry about, it sorts itself out at the end of the financial year.
Here are some issues it would have caused:
(a) Reduced my chances of getting an education at a top rate university (because I would be considered "at risk" for not succeeding, at least on paper). So I would have ended up at a less prestigious school, made less money, etc.
(b) If I had say 10% of my income siphoned off to a private company (which is a scary thought), I wouldn't have the opportunity to choose how to spend my money. For example, I have chosen to skip paying a loan payment to pay rent. I called and asked if this was alright, they told me it was fine. It kept me from being homeless for a month while I handled a cashflow issue.
(c) Because of the tax benefits, I have zero incentive to pay off my loan quicker. If 10% of my income went to some loan agency I'd pay it off quicker than I am now, and thus have less interest to write off. Further, I make money quicker than I lose it due to loan interest on the stock market, so I can actually pay back my loan faster by investing, then paying down the loan. This also helps spur the economy along, and at scale this is a massive reason it's not in anyone's best interest to implement a plan like this.
This isn't prudent asset-liability matching. If your loan is 3.5% and you can find investment-grade bonds that (a) yield more and (b) compensate you, in the spread, for your risk and hassle, then that might work.
I remember how, with great fanfare, DOW 10,000 was ushered in. I was in 8th grade and it was 1998 or 1999, I remember how ten years later the DOW hit about 6,000.
We do not know how capitalism will respond to competent robotics and AI, and a population bust.
My highest loan is 10% interest (private loan), average between all of them is 5.2%. My annual return on the stock market is always well above 10% YoY... sooo it's basically never worth it.
Which is my point, the whole "we'll make you an indentured servant until you pay us back", seems stupid.
Point is, investing v. paying off debt is not a simple matter of average expected growth compared to interest paid on loans. Investments often lose large portions of their value in the short-term while paying off debt is always a guaranteed return. So, for short loans (<15 years), it's probably not wise to use average expected return, instead use a wide range of +15%pa and -30%pa.
I'd argue the fact that you've beaten the average expected yearly return for so long suggests that a correction is imminent and paying off debt has a better expected return than investing. This goes doubly because so many people have forgotten the lessons taught by past recessions and believe that 10%+ annual returns are the norm.
I wont even disagree, but my point is that it should be an option to do, versus money just being taken out of my pay check to pay a loan.
That would make you one of world's most elite money managers. I'm sorry but that sounds to good to be true. Bernie Madoff was getting his clients 10% year over year and that turned out to be too good to be true as well.
Could you share some details on this investment strategy you have?
I always do this in March, after my tax return, because that's my "play money". All the money I made from the prior years investments + tax return I usually dump into other investments that hold up over time i.e. gold, real estate, etc. or invest in my business.
Here's this years, which has been unusually good:
I pick the high movers using a method I'm not going to describe at the moment. However, I am making a website which will help others invest as I do. It'll be a paid service, but I'm not going to charge outrageously. You can follow on my blog, I plan to release it sometime in late spring:
Feel free to follow me, and I'll send out an update when I'm ready to release the stuff.
>"I use part of my student loan payments to shield against higher taxes. AKA I can write off the interest payments on my tax return."
and then:
>"All the money I made from the prior years investments + tax return I usually dump into other investments that hold up over time i.e. gold, real estate"
I am sorry but that kind of sounds like you are gaming the system. I don't think the intention of the student loan tax deduction was to allow people to buy gold and real estate but rather to help people to make ends meet. You don't actually need that deduction it sounds like.
Story time.
A side hustle I'm working on is creating a site that matches investors with solar projects. Due to how solar tax incentives are structured, if I can properly estimate your tax liability, I can create a partnership vehicle where instead of your tax liability going to the US federal government, its all invested in solar generation projects.
You still have to pay taxes, but because of a legislative and tax code hack, you can fund renewable energy deployment instead of federal tax receipts.
This is gaming the system, but I'd rather my money go to clean energy and not bombing innocent brown people and another carrier group. Economics 101 is incentives matter. If you set a system up, be prepared for people to poke at it to find its weaknesses.
EDIT: @bogomipz
Regarding your comment:
"So that Federal Government was OK when it came to you getting a student loan for an education but it's somehow not OK when it comes to paying your fair share to fund it? I don't like paying taxes as much as the next guy but I do it and I understand why I need to."
I'm a high school dropout, and the services I care about (Social Security and Medicare) are funded out of my payroll taxes, which I'm fine with (I've paid $73k into Social Security, and $21k into Medicare, not including the exact matches my employers have paid in). I pay for the things that should be paid for (social services), and avoid paying for things that are unjust (the us military).
So that Federal Government was OK when it came to you getting a student loan for an education but it's somehow not OK when it comes to paying your fair share to fund it?
I don't like paying taxes as much as the next guy but I do it and I understand why I need to.
I'm only a couple of years out of school so don't think I'm rich or own property or anything.
But you did have a choice. You spent it before you had it, by borrowing from someone else. That was your choice.
For me, my student loans were about £20k overall (including living costs) and I'm paying back about £2.5k/year from it. Most of my friends are never going to pay it back.
However, it's not really put much burden on universities as they get the money immediately and then the losses from non-repayment are absorbed by the government.
It scares me that people are taking on these loans with that assumption, spurred on by people like Martin Lewis.
The government has changed the rules before... they may change them again.
To be fair to Mr Lewis, he apparently put his money where his mouth is and engaged lawyers to challenge the recent changes, but I haven't heard of any results... http://www.telegraph.co.uk/finance/personalfinance/borrowing... Does anyone know if it was just posturing for the press at the time, hoping we'd forget about it? Was there ever a ruling or result?
My student loan for getting a BSc and MSc in Computer Science at one of the top universities in the UK is about ~12k total. But it's reassuring to know that if I lost my job tomorrow, I wouldn't have any payments to make until I found another job.
https://www.theguardian.com/money/2012/sep/24/student-loan-a...
(I don't believe it's changed since)
This wouldnt prevent students from going after useless degrees like they do today.
> 2. The burden of "payment" is shifted from the student to the school, as the school now must make sure their students are capable of getting good jobs if they want to be paid themselves.
It's usually not the schools loaning the money, they don't care what you do as long as you pay tuition, its banks and the federal government that loan the money, and they don't care because interest keeps accruing on your loan and you cant get rid of it.
I often wonder if the easy answer is to make student-loan debt dischargeable on bankruptcy. Yes, some banks would stop making the loans. But, would they all? I have to assume there would still be a market for student loans.
It isn't because the minimum repayments are so low they never come close to the large interested accrued?
Mitch Daniels, the president of Purdue, has been pushing for this as a sort of solution to student loans, but it just ends up with the higher-income students subsidizing the education of the lower-income students, where 'income' refers to post-graduation job income.
You know what else does that? Having government guaranteed loans in the first place.
Such an option has been available for many years, though the main loan servicer has been accused of directing people into temporary deferments instead.
http://www.huffingtonpost.com/entry/state-prosecutors-navien...
Yes, this is available for most federal student loan programs today.
[0] https://studentaid.ed.gov/sa/repay-loans/understand/plans/in...
Unfortunately interest keeps doing its thing so many people will see their loan amounts increase once on IBR.
This leaves their only likely out as forgiveness by making 120 payments and working for a gov/education institution for 10 years.
It's treated as taxable income unless you are insolvent, which you might be if you owe a lot of money.
Yes. In the US, this was reasonably common before student loans.
Some advantages I can think of:
1. Educational quality is more tied to student success.
2. The burden of "payment" is shifted from the student to the school, as the school now must make sure their students are capable of getting good jobs if they want to be paid themselves.
3. Education and corporate "curricula" are more coupled. This could also be a disadvantage, depending on how you think about it.
Some diadvantages:
1. This hurts liberal arts, where the value is more opaque.
2. Research based, or generally any profession that's intellectually difficult, but pays low will be discouraged, implicitly through this.
3. Makes the point of education a bit more professional and practical, which may have longer term effects (people who think outside of the box generally aren't the ones who are paid well, initially).