Illinois Takes on Student Loans with Pay-It-Forward Bill
March 11, 2014

Another state is stepping up in the fight against student loans. Illinois has proposed HB 5323, The Higher Education Student Assistance Act, that would help combat debt for state grads and offer them a brighter financial future. The bill’s sponsors wrote into the legislation that it should be modeled on Pennsylvania’s Pay It Forward Pay It Back program.

Illinois takes on student loans

New IL legislation proposes interest free school loans

In essence, the plan would allow Illinois college students to borrow interest free from the Illinois Department of Revenue (or another entity to be named) to pay to attend college within the state. Upon graduation, repayment would begin, but without the onerous add-on of interest to make repayments more affordable. Repayments back into the pool would fund future generations of borrowers.

The initial measure is simply to conduct a feasibility study into whether the state can afford this plan, what it would cost and how it would work. The measure has already passed the Illinois State House of Representatives and is now in the hands of the State Senate. So far, so good. This would be a huge boon to borrowers in the state.

As of its last reporting, the Project on Student Debt shows that grads from the Land of Lincoln come out of school owing an average $28,000 and that 64% of grads owe student loans. This makes them the 15th state in the US for highest graduate debt and 13th for percentage of grads who get their degree through debt.

But what would the impact of interest-free student loans be? $28,000 of debt at 6.8% would generate monthly payments of $322 for a traditional 10 year repayment plan. This would mean more than $10,500 in interest and a total repayment of more than $38,500. What would you repay without the interest component? Your payments would drop to $233 a month on a 10 year plan. That’s a 28% reduction in repayment and would make loans far more affordable.

This legislation would be quite meaningful for future borrowers but, as with most federal and state plans we’ve seen, they do little (or nothing) to help out borrowers already in debt. Addressing the finances of future borrowers is great, but what about the 11.5% of borrowers that are already in default? This rate has been on the rise for the past decade and is, according to Forbes, the highest delinquency rate among any type of debt.

We’ve got high hopes that states will be on the forefront of addressing and correcting the student loan crisis because they are closer to the problem. States’ financial viability relies on consumers participating in the system by buying homes, cars and spending money in the local economy. Student loans stymy all of this and cost everyone by dragging the economy and opportunities down. While the federal government can continually debt spend and quite literally print more money, states simply don’t have this luxury.

Fingers crossed that Illinois gets the study legislation passed in short order, gets good results from its research and rapidly implements this zero interest rate plan. Then, perhaps, they can move on to helping already-in-debt borrowers cope with their student loans, get out from under financial oppression and get on with their lives.

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