Income-based repayment soars

Graduates at George Washington University’s 2015 commencement. Photo: Alex Brandon/Associated Press

Student loan holders are jumping to sign up for income-based repayment plans, writes Mikhail Zinshteyn in The Atlantic. That will be costly for taxpayers.

Depending on the program, the qualified borrower pays either 10 or 15 percent of his or her income over a duration of 20 or 25 years (10 years if the borrower spends that entire time employed at a government or nonprofit position). Any amount not paid off after those periods is excused, a perk that can translate into hundreds of thousands of dollars for borrowers with high student-debt loads.

Borrowing is limited for undergrads, but not for graduate students who who average much higher earnings than four-year graduates.

Income-based repayment programs are costing taxpayers $11 billion a year, estimates New America analyst Jason Delisle. But that could rise quickly, writes Zinshteyn. Colleges “could charge higher tuition and encourage students to assume the costs, with Uncle Sam swallowing their debt loads.”

In 2013, Delisle and colleagues wrote about an administrator at Georgetown University’s law school encouraging students to take out large amounts of debt that’d be excused after 10 years as part of the income-based repayment program’s public-service provision.

“We have a federal program that will provide $150,000 of loan forgiveness to someone who graduates from Georgetown Law, but a poor kid who wants to go to Georgetown undergrad can only get $5,000 a year,” Delisle said. “I would struggle to find a more regressive federal education policy.”

Small borrowers are the most likely to default, writes Susan Dynarski. “Defaults are concentrated among the millions of students who drop out without a degree, and they tend to have smaller debts.”

Loan forgiveness rewards big spenders

The public service loan forgiveness  (PSLF) program offers big benefits and bad incentives, writes New America’s Jason Delisle in Zero Marginal Cost. For graduate students planning careers in teaching, social work and government, it’s likely “the federal government will finance the entire cost, without limit, including all living expenses.”

Combining PSLF with Income-Based Repayment encourages graduate and professional students to borrow more and sign up for degree programs of questionable value. Colleges will be able to raise tuition once borrowers realize they’re not going to have to pay back their loans.

At a minimum, lawmakers should cap loan forgiveness under PSLF at $30,000, aligning it with the limit for Pell Grants to low-income undergraduate students. (There is currently no limit.) The federal government should not provide more in loan forgiveness to graduate students than it is willing to provide in grant aid for a low-income student to pursue an undergraduate education.

There is also a case for eliminating PSLF altogether. Because IBR makes any loan size affordable, PSLF isn’t a necessary component of the insurance IBR provides. Rather, it makes IBR do double duty as generous graduate school tuition assistance for those who want to work in non-profit or government jobs—even high-paying ones.

Teachers can use several, overlapping loan forgiveness programs, if they can navigate the complex, confusing federal aid system.

Borrowing trouble

President Obama’s expansion of income-based repayment offers short-term relief, but will encourage reckless borrowing, enable colleges to keep raising tuition and promote the idea that everyone needs a four-year degree.

As long as college loans aren’t linked to the degree’s value — which varies depending on the major — young people will borrow too much.

Obama extends 10% cap on loan repayment

Using an executive order, President Obama extended generous income-based repayment terms to an estimated five million more student loan debtors. People with student loans will be able to limit payments to 10 percent of their discretionary incomes. Loans will be forgiven in 20 years — or 10 years if they take public-service (government) jobs.

The big winners are people who borrowed for graduate school and private colleges, which can keep raising tuition without fear of scaring away students.

Feds will make college pay — or else

For now, proposed “gainful employment” regulations are aimed at for-profit colleges and career programs at nonprofits. If too many students in a program default on loans or pile up too much debt relative to income, the feds will cut off student aid. Once the bills start coming in for income-based repayment of student loans, “the government is just going to have to shut down the free money fountain” for all of higher ed, predicts EduBubble.

Student aid reforms proposed

A House education subcommittee heard proposals for reforming Pell Grants.

Income-based repayment gives the largest subsidies to borrowers who go to graduate or professional school and people in “public service” jobs. One in four jobs qualifies as “public service,” but working for a for-profit company is a disqualifier.

44% underemployment for new grads is OK

44% of Young College Grads Are Underemployed (and That’s Good News), writes Jordan Weissmann in The Atlantic.  In a weak economy, many new graduates have to take jobs that don’t require a college degree, argues Weissmann. It’s worse now “because the economy got fed through a wood chipper during the recession and we still haven’t picked up all the pieces,” not because a bachelor’s degree has lost value.

The unemployment rate among recent college graduates tends to move “in step with unemployment among all working age adults,” he writes. New graduates are having problems because everybody is.

College graduates during the 80s and early 90s were as likely to be overqualified for their jobs as young graduates today, according to New York Fed President William Dudley. Most graduates then eventually found professional jobs.

The obvious difference between higher education today and in 1990 is the cost of a degree, and the amount of debt students take on to finance it. So while failing to land a college-level job straight out of school might have been tolerable in the past, today it might mean severe financial hardship, especially if students aren’t savvy about how to handle their student debt (three words: Income. Based. Repayment).

There’s evidence that young people who graduate into a recession and start lower on the job ladder never recover completely.

I’d like to see a good survey asking whether collegebound students understand their likely future earnings and loan payments. Do they know the risks? If they did, second- and third-tier private colleges would have to slash tuition or go out of business.

Be deeply suspicious of promises that a bachelor’s degree will raise earnings significantly, warns Tim Donovan on Salon. If the “higher interest rate convinces even a few 18-year-olds not to take on huge debt for that Musical Theater degree, maybe it’s not so bad,” he writes.

‘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.

Safety net or windfall for student debtors?

President Obama proposes expanding income-based repayment of student loans:  Debtors would pay 10 percent of their discretionary income, down from 15 percent, and the loan balance would be forgiven after 20 years instead of 25. The changes will help  borrowers with expensive graduate or professional degrees and lots of debt, concludes Safety Net or Windfall?, a New America Foundation analysis.

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.

The report recommends changes to target benefits to borrowers with lower incomes. The plan is expected to go into effect by the end of the year.

College without crushing debt?

Young people need a college degree to get a decent job, which means they need to borrow.  And, if they can’t get that decent job, they’re stuck with crushing, credit-ruining, undischargeable debt, writes Kevin Carey of Education Sector.  Linking all loans to borrowers’ income will help, but the Obama administration also needs to look for ways to provide affordable alternatives to high-priced colleges.

Community colleges will be able to experiment with limiting students’ access to unsubsidized federal loans in the hopes of preventing overborrowing and defaults.