Uncle Sam has yet another program out to help distressed borrowers. This one bails out anyone with more federally-sponsored student loans than they can afford. Instead of repaying your student loans on a usual time- and interest-based schedule, the government is allowing people to pay based on income. It's an interesting idea, but I worry it could have some bad consequences.
Here the gist of the program, according to an article in the San Francisco Chronicle:
The new program sets monthly payments based on adjusted gross income and family size. Unpaid principal and interest is generally added to your loan amount. Any debt remaining is wiped out after 25 years - or after 10 years if you work in the public or nonprofit sector.
Turning Incentive On Its Head
The article notes:
If you are unemployed, low-income or have a very large debt, you could qualify. "People who need advanced degrees to get low-paying jobs" are prime candidates, says Edie Irons, a spokeswoman for the Project on Student Debt.
Before this program, having a large student loan balance produced a pretty obvious outcome: graduates sought jobs paying enough money to cover those loans. This is the kind of incentive that makes a capitalist economy go around. Young adults want to earn good salaries anyway, but having a pile of college debt certainly enhances that incentive.
Now, however, the incentive from college loans has changed: the more college loans you have, the less incentive you have to earn a high income. I did some calculations based on the IBRinfo website (where you can learn more about the program). If you have $40,000 in federal student loans with an interest rate of 2.5%, here's your annual savings through the plan versus what you would have paid before:
As you can see, the less you make, the more the government rewards you. And if you make less for a really long time, then eventually, the government will wipe any remaining unpaid debt away entirely.
Don't get me wrong: any rational person would still rather be making $200,000 per year with full student loan payments than $16,000 per year to save a few thousand dollars through this program. After all, our progressive tax system hasn't managed to destroy incentive to earn higher income. Yet, it does seem like young people fresh out of college or graduate school will feel more comfortable making lower salaries. If you only worry about the stress debt can create, then that's fine. But if you believe salary is linked to productivity, then you might not be as comfortable with this outcome.
Wacky Mortgage Student Loan Products?
Remember all of those absurd subprime mortgage products you heard about a few years back? Some were even crazier than the standard adjustable-rate mortgages. The really insane ones involved something called negative amortization. In English, that means mortgage-holders paid less each month than they were charged in interest, causing their mortgage balance to grow instead of shrink. Eventually the payment would increase. I'm not sure how such a product ever makes sense, but the notion must have been that these homeowners would refinance the loan eventually or earn a higher income once the payment increased.
Rather than learn from this mistake, this student loan program seeks to emulate it. Edie Irons, a spokeswoman for the Project on Student Debt, explains in the article:
The main downside of the new program: "Like any plan where you pay less than the full amount, you could end up paying more interest over time," Irons says.
I created another scenario. This time, imagine someone who graduates from an expensive private university with a PhD in social work, earning $22,000 per year with $100,000 in college debt at 2.5%. I'm assuming a 10% raise each year. This amounts to a negative amortization loan. Here's what the principal balance looks like for 10 years:
At first, the principal balance increases for several years. Then, around year five, it finally begins to dip below the original balance of $100,000. After ten years, this person has only paid off about $15,100 of the student loans, leaving a balance of around $84,900.
But this has a feature those wacky mortgages didn't: under this program, assuming that social work is considered "public or nonprofit," Uncle Sam takes care of the debt after ten years. That's great news for the social worker, but not such great news for taxpayers. The program amounts to the government subsidizing private universities.
Higher Education Costs
I also suspect another unexpected outcome of this program: higher costs for secondary education. Right now, the demand for expensive education has something holding it back -- people who don't want to be deep in debt. But if there's less concern about student loan costs, then demand for more expensive education should increase. That increased demand will drive up prices, since people will be willing to pay more, as the actual cost to them might be less.
More College Loans
Finally, this program might have the odd effect of actually increasing the amount of student loans. Universities will probably feel less pressure to provide as much scholarship money. Student loan debt burdens will be easier for graduates to handle and sometimes vanish entirely. As a result, they will have an easier time convincing new students to take out more loans. This might be just in time for expensive private colleges to build back up their endowments after losing millions in the bad market.
What about just forcing the privates to explain, in full, where the tuition and housing cost are going, as well as the their budgets? If not disclosing to the public, then at least to accepted students and their families? I swear, the lack of oversight is one of the major yet overlooked reasons that tuition has gone up incredibly. If people actually saw this and took action, tuition costs would actually go down, or programs (such as tuition freezes) would be in place to make college actually somewhat affordable.
over time, yes it will increase costs, but in the short term of 10-20 years it will provide MUCH MUCH needed student loan relief. IMO, student loans are exponentially worse for my generation (25-something) than they were for the previous.
Why? What has caused college costs to skyrocket?
I graduated from a well regarded private New York City college in 1970. My tuition (I commuted) was $1100 per year. Today, that same school charges $28,000.
I had a $350 per year scholarship, so I had to come up with $750. I easily made that working construction in the summer, working for the Post Office at Christmas, and working a few nights a week in a bar. In fact, I had money to buy a car. I sure could not do that nowadays.
Generally, the only thing that runs up the cost of anything is demand. Easy college loans, just like easy mortgages, increases demand and drives up the cost of the product. If the easy loans had not been made available colleges would have been constrained in their ability to inflate the costs.
The very same people who complain about the mortgage companies making easy loans that drove up the price of houses until people could not repay, call for MORE loans for college.
This is primarily a problem of the middle class. Working-class and first-in-family students who actually make it to college generally have copious scholarship and grant programs to suck up tuition and living expenses.
Having gone to a very exclusive school with a high tuition, it was always funny to me that the middle class (50-100k family income) students were building huge debt, where the poor and affluent students had none. Just another way our country is screwing the not-so-well-off-they-can-just-write-a-check or not-so-poor-they-need-charity classes.
Yes. Those lucky bloody poor people. Never mind that, after controlling for aptitude, poor students attend and graduate from college 24% of the time, compared to 74% of their higher income counterparts.
But let's not let that get in the way. Silly poor people get all the damn luck.
I agree that fewer attend and graduate from college, and that's a tragedy that needs to be fixed.
But...
They are lucky, at least the ones that make it to college. They become exceptionally advantaged upon graduation with no debt.
Oh wait, they don't have family support? Is that your next argument? At least financially, middle class families tend to be so screwed that middle class graduates don't have any family support either.
Would I ever wish that I had grown up impoverished? Of course not. Do I think it's right that we have an entire generation of young people who start their adult lives 50-100k in debt just because they fall into an arbitrary bucket called "able to pay"? No way. This is not an either-or equation.
People are aware that it's difficult to grow up poor and make it through school; but I see my friends with middle class families far more burdened 10 years out of school (and if you adjust their gross income to take into account their student debt they fall into the "poor" catgory) than my "poorer" friends who made it out clean as a whistle, and therefor have more mobility and more options and more money now.
According to the article: "The new program sets monthly payments based on adjusted gross income and family size. Unpaid principal and interest is generally added to your loan amount. Any debt remaining is wiped out after 25 years - or after 10 years if you work in the public or nonprofit sector."
That makes it pretty clear what our current administration thinks of the private sector. The thing about the public sector, over 50% of whom are greedy, lazy, worthless union scum whose wages and benefits far EXCEED the average private sector remuneration, is particularly galling. Of course those public employee unions will contribute lots and lots to Dem candidates.
ed - the current administration wasn't the current administration when the CCRAA became law. Pres. Bush signed it into law. The regulations through which the program will be administered were drafted largely - if not completely - during Pres. Bush's administration. Respectfully, this law and the current administration's thoughts on the private sector have nothing to do with each other.
Thanks for that. However, it passed in September 07 - meaning under a Dem congress, the same clowns who are still controlling things. I'm sure nobody in that Dem controlled congress ever thought of rewarding their union public employee friends by have the rest of the taxpayers pick up the cost of their college education - after we get to pick up their obscene salaries and benefits.
PS, I'm in New York where the unions basically control the state, and NYS is dead flat broke.
"I also suspect another unexpected outcome of this program: higher costs for secondary education"
Yet the author provides no evidence of this. Why would forgiving college loans do anything to effect the costs of high school?
"That makes it pretty clear what our current administration thinks of the private sector"
Do you realize that this is a result of the College Cost Reduction Act of 2007? Did you also know who was President in 2007? Don't think the author is aware of it either. The author also doesn't seem to be aware that the forgiveness itself is a taxable event, or at least he fails to mention it, which makes the deal slightly less sweet.
The whole higher education funding system needs to be reformed. We are stuck in a vicious circle where rising costs lead to the necessity for measures such as this and increasing the limits for subsidized loans, which in turn increases the ability of people to attend more expensive institutions. Something has to be done about it. Simply cutting off funding would be counterproductive as we would simply create of people who go to elite institutions based on their parents' income, rather than encouraging excellence in education (though I suspect the former is what the author seeks).
I corrected my earlier post, but pointed out that it was the Dem congress that passed it.
Only a tiny fraction of college students attend these "elite" institutions. The cost of non elite colleges has also risen well above of any rate of inflation - to the silly level. As long as the gov't is willing to give more and more money to kids for college, the colleges will increase their costs.
"We are stuck in a vicious circle "
And you feel this is a good way to stop the vicious circle?
It sounds like more of the same, just rearranging things to make it last a little longer, bloat up a little more, get more expensive, push the ball further down until someone else can deal with it.
Here's a solution. Deal with your own problems. If you don't want to, default.
"The thing about the public sector, over 50% of whom are greedy, lazy, worthless union scum "
Yes a well-founded scientific finding. How dare those social workers, librarians, and elementary school teachers try to get to get student loan relief!
Right....
Agreed that is a blanket statement with no support, however, I think most of us can relate to the original commenter's anger. How many times have you been stuck in traffic because a road construction crew had 2/3rds of the highway lanes closed off for 3 miles while 3 guys actually did any work and another dozen were standing around watching?
I'm not defending the statement, not hardly, but I think i understand where he was coming from.
Yeah, I feel real sorry for the 100 grand per year teachers here on Long Island. You know, the ones who get to sit on their lazy ass all summer and for various weeks during the year. the poor teachers who are "compelled" by contract to work 183 six and a half hour days per year.
The poor teachers who retire at 70% (read 70 grand) of final year income after 30 years regardless of age - with fully paid health benefits for themselves and their entire family. The poor teachers who only pay into their retirement for 10 years. The poor teachers whose pension is TAX FREE in NY while all private sector pensions are fully taxed after $20,000.
I get to pay $7,000 per year, on a modest home, in school taxes alone to keep those pigs happy. My wife has to go over a bridge every day to get to work. If she were to take public transport, it would take about 3 pours each way. She gets to pay 9 bucks PER DAY in tolls - to keep the union public employee pigs happy - and it goes UP next week.
Now I'm supposed to pay for college for this union scum?
Ed,
You realize that if people are making this much money (100k) they won't really benefit much from this program, which is called "INCOME BASED REPAYMENT". Even the table shown here only goes up to 50k.
For someone who likes to call people lazy....
And I seriously doubt the person collecting your tolls has a huge amount of student loan debt, so I am not really sure that relates.
You did not read the linked article and only relied on a graph made up by the author. From the linked article: "There is no income limit. Even people making $100,000 could qualify if they owe more than they earn in a year."
Union teachers don't start at 100 grand, they get step increases every year for just showing up for their less than 1/2 year job. So, yeah, the pigs would qualify big time.
The bridge tolls don't go to the bridge. They're siphoned off to the Metropolitan Transportation Authority, which has many, many worthless college educated bureaucrats.
ed,
I love those 100k teachers that piss you off. AFT survey: the average income of teachers in 2007 is $51,009 - exceeding 50k for the first time in history. And the median salary for a starting teacher? Just over 34,000 a year.
So teachers are slightly-better off as they approach retirement. Blast them for educating children! It doesn't change the fact that a teacher exiting college with 60k in student loans would expect to make about half that for work.
But Jesus, man. Don't let facts get in the way of your righteous vitriol. Rock on.
"Here's a solution. Deal with your own problems. If you don't want to, default."
Good solution, people defaulting on federally backed loans will surely save the taxpayers' money.
"Here's a solution. Deal with your own problems. If you don't want to, default."
Student loans can't be discharged in bankruptcy.
This is actually a really big problem for top MBAs and lawyers who want to do public sector work but find that public sector work can't handle the student loans, and for government agencies that need better employees but can't compete with Wall Street and top law firms. I am incredibly sympathetic to this situation. (Especially when it comes to the professionalization and mobility of the working class.)
In terms of an incentive as part of the compensation package, this is a steal for the government. If the student loans are off the table, it's easier to justify not hustlin yourself on the Street.
"...graduates sought jobs paying enough money to cover those loans. This is the kind of incentive that makes a capitalist economy go around."
This line, and so much else about this article, refers to the economy as if it works. Graduating college with the freedom to consider criteria other than 'where can I get the maximum salary?' sounds pretty good to me. The author prefers to reserve that freedom for the rich.
I don't think he recognizes that considerations other than salary exist, and that the pursuit of alternatives would have a net societal benefit.
http://www.youtube.com/watch?v=xtIM_TEQxwA&feature=channel_page
I am saddened by the bitterness of some responses to this new Income Based Loan Repayment system. Now, as a hefty loan payer myself, I was overcome with joy to hear of this new repayment plan. I graduated from a private school and left with $70k in debt. My goal in life is not to make money for myself like the modern mentality entices us to do. I wish to work for others who are in need. Jobs such as teaching in low income areas, disaster relief, nursing, fire fighters, social workers, disability aids, or ESL teachers do not make big moolah. Do you think people are taking these jobs with the intentions of making a low income so they can benefit from loan forgiveness? With the economy right now, do you think it is no big deal to find a job making enough money to pay off $1000 in debt a month while paying for an apartment and transportation fees? I am not the only one in the sinking boat. My generation has to deal with a ridiculously high tuition while balancing our debt and living expenses. The lazy ones you speak of will be asking mommy and daddy to help, or default. I dont believe that this new repayment method is so horrible. Now I can do work helping others who need it and cant afford to pay me enough for a luxurious lifestyle.
Besides, your not the only ones who should feel bitter. I have a lot of debt to pay off with a high interest rate which means I am forced to pay a third of my original loan amount just in interest to the government. They already screwed me over, I am happy to let them cover the left over amount for me after 10 years of working jobs that not many people care to do, but are neccessary to help the less fortunate than yourselves.
Please, give me insight to the flaws of my thinking.
Tara, I'll list a couple here. First of all, I think it's honorable that you are moved to serve others.
If you were motivated to work in the public sector, your first mistake was to select an expensive private school. I realize that colleges and high school counselors encourage good students to go to the best college they can. The college you select is only one part of your life. In this case, it may have limited your options since you now have to pay for your loans.
If, as a tax payer, I am going to foot the bill for an ESL teacher's education, I would like to get the greatest bang for my buck. A public school would be a better deal for me.
One suggestion I have for you, since you are saddled with a lot of debt: think about your life's plan. Maybe right now isn't the best time to go into the public sector for you. Maybe your life will be more comfortable if you choose to go into a charitable career when you've established yourself, paid off your debts, started saving for retirement, and (most importantly) have life experience that will actually benefit the people you're trying to help. A common practice among baby boomers is to drop out of their profitable careers when they've had their success and do something for the public sector like teaching. That way, everyone benefits from their contributions to business as well as their contributions to society.
Not all of your goals must be realized today. I promise that in 10 or 15 years, students will still need ESL.
My first bill after graduating from college was 170% of my gross income. I worked for years with my loan companies to try and get my payments to a manageable level. I doubled my income in 3 years, but it still wasn't enough. When a medical condition added more weight to my load, I was unable to even make the basic interest only payments.
The problem the government is trying to solve is a lack of flexibility in lenders that leads to people like me - people will a very high longer term income profile - to divorce from the system and default. You'd be amazed how hard it is to find someone who's moved three times and isn't terribly interested in fixing their medical-bill screwed credit rating.
I've doubled my income again and I'm very, very comfortable. When I feel like it, I may contact my defaulted loans and negotiate a deal at 50% or 40% of the principal.
Debtors have agency to take control of their debts; lenders have already indicated they don't want to be a part of the conversation, which means they generally aren't a part of the solution. IN the end, this flexibility is going to dramatically reduce the number of defaults that student loan lenders have to deal with; they just don't like that it also reduces the death-grip they have on the lives of those who owe them money.
This is how just about everyone pays for university here in Australia, it's called the HECS scheme. Your university fees automatically accumulate as a debt and after you graduate it comes out of your paycheck as a small amount on top of tax in increasing amounts depending on your income.
so higher education is open to everyone willing to work for a university degree and not just people with rich parents. And it still pays for itself. And the idea that graduates are somehow disincentivised to work for promotion because of a tiny increase in their hecs repayment... is extremely marginal, if not far-fetched.
The program is a good, if mildly flawed one. Unlike programs to bail out distressed homeowners, which merely forgive irresponsibility, the CCRA actually has a compelling public policy aim: to encourage talented young people to pursue careers in public service. There's been a lot of complaining from previous posters about the laziness/incompetence of public sector employees. Part of the reason for this is that public sector pay is TERRIBLE. Thus, the most intelligent/capable young people will always gravitate towards the private sector, leaving the less competent to staff our bureaucracies. If you consider this a problem, you should be willing to endorse a program which alters this incentive structure. And this one does a pretty good job.
I'll use myself as an example. I begin law school this fall at a Top-10 school. It's my dream to serve the community as a prosecutor after I graduate. Yet, due to the astronomical costs of tuition and city living, I will have ~$200k of student debt when I finish. With a normal amortization schedule, I'd be paying ~$1500 per month just to service my student debt. This makes the ~$60k I'd be earning in the DA/US Attorney's office completely unlivable. Thus, I'd most likely end up forgoing my dream and either a) working for a big corporate firm or b) working on Wall Street. I fail to see how society benefits in this scenario. Now, becaue of the CCRA, I can actually become a prosecutor without having to worry about my student debt.
The primary flaw with the legislation is that, at the point where one's debt will be totally forgiven after 10 years, there's no incentive to limit one's borrowing. i.e. If you can afford to pay for some of your education out of pocket or by working, now it makes more sense to just finance the entire balance with federal loans (no difference between $50k of debt and $150k of debt if it will all be forgiven anyway).
I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.