One of the big issues this year has been the burgeoning student debt load.  OK.  To be honest, it’s the repayment failure rate that has made the news more often.  You do recall that about 1 in 4 of these student loans are in default- or that the student is behind in payments.

And, while it doesn’t look like much has been going on, President Obama seems to have enlisted more than two score (40) entities to develop programs that are more affordable for the borrowers, that let them manage this tremendous debt load.

That’s why Fidelity Investments has decided to help those in its employ.  Should one be employed beyond six months, Fidelity will pay between $ 2K (minimum) and $10K (maximum) to the student’s student loan creditor.  Right now, almost 6000 employees are so benefitting.  (Fidelity claims they’ve covered $ 5KK in principal and interest this year alone.)

Many borrowers are converting student loans to “pay as you earn”.  Of course, this may mean that one’s payments are lower- but it does nothing to adjust the principal owed.  Which means that interest keeps accruing.  And, that just means a student will paying for this loan for a very long time.

Basically, these pay as you earn programs require the student to pay 10% of their discretionary income to the servicer.  And, the students must demonstrate they have financial hardship paying back the loans.    And, after 20 years of payments, the remaining debt should be forgiven.  And, this program is available to “Federal Direct student-loan borrowers”.  It doesn’t address the PLUS loans- the ones parents took out to help their children.

There still is an income-contingent repayment that covers the same “Federal Direct student-loan borrowers”- as well as those who consolidated their Parent PLUS loans.  The repayment program stipulates that 20% of one’s discretionary income is required to be paid, and the remaining debt after 25 years is forgiven.

Some students may find this useful to lower the payments for the Federal portion of their debt.  And, then pay more for their private student loan debt.  Because that debt comes with much higher interest rates.  Once the Federal debt is paid, the student can pay the money they were allocating to the federal repayment for the loans to the private loans and amortize the principal faster still.

Oh, and there’s yet another kicker.  The same kicker that used to apply when you had your house foreclosed or exercised a short-sale.  (OK.  The tax law has now reapplied this “kicker”.)  You owe taxes on the forgiven amount.  So, if $ 100K of student debt (as an example) were to be forgiven, you now find yourself in one of the top tax brackets and will be paying 20 to 30% of the forgiven amount in income taxes.

So, there’s some improvement- but clearly NOT enough.  I’m pretty sure this crop of student loans will not be paid when they have their own kids heading off to college.  Which is a big, big problem for all of us.

Consumer debt is now almost 20% of our Gross Domestic Product (GDP).  (Americans are currently carrying about $ 10 trillion in credit card debt, about $11 trillion in auto loans, but about $ 15 trillion in student loan debt!)  And, that big increase in consumer debt is mostly due to student debt.  If we exclude student loans owed to the US government, that percentage drops to about 14%.   Which means that 6% of all consumer debt is student debt that is owed to the US government.

It’s not just their problem- it’s all of ours!  And, now you also know why those proposals to let students go to public colleges free make pretty good sense.  (Not including the fact that public tuition [not room and board, just tuition] has increased from under $ 300 in 1968  to some $ 30K nowadays.)

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