Reform Student Loan Program

Government should initiate a private loan program where by private loans do not accrue interest while the student is in school or is unemployed. In return, the interest collected by private institutions on these loans is not subject to any corporate income tax. Since there is virtually no risk to the lender the rate charged for these loan should be capped at the Federal Funds Rate or Interbank rate whichever is lower. Additionally, any interest paid on these loans should be treated as a refundable income tax credit (not deduction) effectively making these loans interest free to the borrower. The payment on principle should be limited to no more than 10% of the borrowers taxable income (after deductions and taxes) on the amount that is above the poverty line for the region the person resides in. The length of time to repay the loan should be extended to up to 40 year following those terms (interest as a refundable tax credit and principle limited to no more than 10% of after deduction and tax income). Any amount not paid back at the end of the 40 year period would be forgiven. The institution making the loan would have to write off a third as a loss. The government would cover a third. The last third would have to come from the accredited instituion that the borrower attended. To avoid abuse, any inheritance or lottery winning would have to be first used to pay off this debt to the extent minimum payments were not being made. While unemployed and not raising a family, the person would need to participate in some sort of community or public service which would be credited toward the loan principal repayment at the minimum wage rate (the government would pay this on the borrowers behalf to the lending institution). To encourage faster repayment when possible a percentage of principle paid above one's 10% of income would be eligble for tax deduction. To encourage schools to participate, their eligbility to recieve federal grants and research money would be tied to their participation. To further encourage financial institutions to participate, they could be required to make a certain percentage of their loan portfolio be allocated for this purpose. While the preference is for private institutions to provide the funding, the federal government should provide the loan funds if private institutions do not fill the need. After all a government is willing to provide loans to big corporations should be wiling to provide loans to its citizenry that is trying to better itself. This comprehensive plan is better than absolute forgiveness because it encourages responsibility for the financial choices one makes without unduly punishing people for bad luck and factor out of their control.