‘Repayment’ plan = loan forgiveness

President Obama’s more generous plan for income-based repayment of student loans means “typical undergraduate borrowers will not repay their loans,” writes Andrew Gillen, now research director at Education Sector.

Using the New America Foundation’s IBR calculator, Gillen looks at repayment for average student borrowers, who run up $26,600 in debt, and starts work at $27,000 with 3 percent salary growth per year.

To pay off the debt in the standard (10 year) plan, their monthly payment would be $307. But under IBR, their monthly payment in the first year drops to $63, which doesn’t even cover the interest on the loans (meaning their balance is growing over time). Over the 20 year life of the loan, they will repay less than what they borrowed (<$23,000), and will have over $40,000 of debt forgiven (paid by taxpayers).

Even if their starting salary is $35,000, they will still end up having $20,000 of debt forgiven. Moreover, borrowers who become parents during their loan repayment will find their monthly payments are reduced drastically. If the $35,000 starting salary graduate has children 5 and 7 years into repayment, they will repay much less than the principal of the loan (total payments <$18,000) and will have more than $45,000 of debt forgiven (paid by taxpayers).

Many borrowers won’t repay the principal, let alone the interest.

The priorities are skewed, Gillen writes. While low-income students will get $22,000 in Pell Grants to attend community college, upper-middle-class students will get a (delayed) grant of $40,000 or more, a gift from the taxpayers.

Big borrowers — those who’ve chosen a high-cost private college or earned a professional degree — get the best deal, notes the New America Foundation in Safety Net or Windfall?

. . .  contrary to benefitting low-income borrowers, the pending changes to IBR will actually provide generous benefits to borrowers with higher federal loan balances – those with graduate or professional degrees. A borrower with an MBA or a law degree can easily have a six-figure loan balance forgiven, even if his income exceeds $100,000 for much of his repayment term.

IBR treats the symptom (high college debt) rather than the disease (high college costs), Gillen writes on Minding the Campus. He favors income-contingent lending (ICL), which actually requires repaying loans.

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  1. Interesting. It seems to me that this is just a step away from government paid secondary education. Who will try to repay their loan in full if they know that they can just ride it out 20 years and have the whole thing forgiven?

  2. Crimson Wife says:

    How many college graduates make <$35k for more than a few years early on? The median income of new college graduates is $44,259 according to the National Association of Colleges and Employers using data from the Bureau of Labor Statistics. And for those with bachelor's degrees plus 10 years' work experience, the median salary is $70,600.

    • Not everyone who takes out these loans graduates. In fact, I *think* that about 50% of the kids who start college don’t get a 4-year degree (of course, some were aiming for an AA, so this isn’t a failure). Those salary stats don’t apply to them, but the loan stats do.

  3. Stacy in NJ says:

    The more generous the student loan/grant terms the higher tuition will go. The subsidies drive up the cost. This is as true for health care as it is for education.

    If we want to control the cost of ed (and healthcare) – inflation really – we need to drastically cut the subsidies.

    But tell that to the middle and affluent class and the caterwauling will commence. Middle class people love their welfare benies.

  4. Given that the cost of college has risen almost 3X the ROI appears to look pretty poor anymore, except for some majors which can pay a large amount of money over time.

    Debt forgiveness appears to be another mechanism to relieve those of responsibility for not researching and obtaining a degree which they could make a long term career out of (IMO).