The Atlantic - How IBR Misses The Mark

[Lesley]

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http://www.theatlantic.com/business/archive/2015/03/how-student-debt-stunts-financial-growth/386300/

 

[deleted480308]

tuition is only as expensive as it is because we keep throwing money at every student regardless of the financial viability of their degree. If we removed the government from the equation and removed the restriction of bankrupting out of loans, you would find the market would force tuition into ranges that actually made sense for each career. Those fields with high incomes and outlooks would have no problem. Those schools trying to charge $70k/yr for master's in 14th century haikus would have to find cash buyers or lower their price. The populace shouldn't be subsidizing college education like this...

 

[Lesley]

tuition is only as expensive as it is because we keep throwing money at every student regardless of the financial viability of their degree. If we removed the government from the equation and removed the restriction of bankrupting out of loans, you would find the market would force tuition into ranges that actually made sense for each career. Those fields with high incomes and outlooks would have no problem. Those schools trying to charge $70k/yr for master's in 14th century haikus would have to find cash buyers or lower their price. The populace shouldn't be subsidizing college education like this...

https://www.midwestern.edu/Documents/Financial Aid documents/COA Forms/2014-15 revised DG/DENTAL_IL1415 final.pdf

With prices like these, and these figures are not an anomaly, along with a potential increases of 4-7% for 2015-2016 and for the years going forward, unsubsidized interest rates close to 7-8% , origination fees of approximately 1.5 - 4.6%, even those in fields with higher incomes could very easily have difficulty paying their debt back. As stated in this article, many borrowers, approximately 34%, with only $5,000 or less in student loans are presently unable to pay their debt.

For large or small borrowers, those with small or large incomes, their debt can be a lifelong burden and like so many other things in life what effects them negatively will transfer to their offspring as well. Not reigning in costs whether it be tuition, pensions, etc is a burden that all tax payers will pay the brunt and burden of down the road.

I wonder what income is really needed to comfortably pay off a $500,000 - $550,000 school loan debt (loans + interest while in school) for 20-25 years with 6-8% interest rate and then pay taxes on the all unpaid principle and accrued interest at the end of the 20-25 year repayment period?

 

[deleted480308]

https://www.midwestern.edu/Documents/Financial Aid documents/COA Forms/2014-15 revised DG/DENTAL_IL1415 final.pdf

With prices like these, and these figures are not an anomaly, along with a potential increases of 4-7% for 2015-2016 and for the years going forward, unsubsidized interest rates close to 7-8% , origination fees of approximately 1.5 - 4.6%, even those in fields with higher incomes could very easily have difficulty paying their debt back. As stated in this article, many borrowers, approximately 34%, with only $5,000 or less in student loans are presently unable to pay their debt.

For large or small borrowers, those with small or large incomes, their debt can be a lifelong burden and like so many other things in life what effects them negatively will transfer to their offspring as well. Not reigning in costs whether it be tuition, pensions, etc is a burden that all tax payers will pay the brunt and burden of down the road.

I wonder what income is really needed to comfortably pay off a $500,000 - $550,000 school loan debt (loans + interest while in school) for 20-25 years with 6-8% interest rate and then pay taxes on the all unpaid principle and accrued interest over the 20-25 year repayment period?

the point is that tuition can only keep rising because the government makes it possible for everyone to keep paying, regardless of the financial value of the degree

and if you are defaulting on a 5,000 student loan you are either unemployed or not working in a field that needed a degree

schools will lower tuition to accommodate the market

 

[Lesley]

tuition is only as expensive as it is because we keep throwing money at every student regardless of the financial viability of their degree. If we removed the government from the equation and removed the restriction of bankrupting out of loans, you would find the market would force tuition into ranges that actually made sense for each career. Those fields with high incomes and outlooks would have no problem. Those schools trying to charge $70k/yr for master's in 14th century haikus would have to find cash buyers or lower their price. The populace shouldn't be subsidizing college education like this...

the point is that tuition can only keep rising because the government makes it possible for everyone to keep paying, regardless of the financial value of the degree

and if you are defaulting on a 5,000 student loan you are either unemployed or not working in a field that needed a degree

schools will lower tuition to accommodate the market[/QUOTE



I don't believe in bankruptcy for student loans, and if we allowed it, the populace would still be subsidizing college education just in a different way. Just not better in my opinion. No one should be borrowing without understanding this is a non reversible obligation. Colleges and specifically admissions offices that guide students, in any profession, to take on debts beyond their eventual and reasonably presumed means, should be held accountable. However, student loans are important. Without them I and the majority of people would not have been able to get education. Having them to some degree can be a motivator. However the levels of debt incurred by a seemingly increasing population for the past couple of decades has not been a motivator but a captor. Even if costs are reduced some and/or if rising costs are muted, the costs are already way too high and force levels of borrowing that are untenable. Granted, something seems a little off about defaulting on a $5,000 school loan. What jumps out at me in this article and rings so true alludes to the promise that those who work equally hard, have an equal promise of prosperity. Yet, this concept now weights heavily on the position, "Did you or didn't you have a reasonable amount student loan debt relative to your potential income?"

 

[Lesley]

I don't believe in bankruptcy for student loans, and if we allowed it, the populace would be subsidizing secondary/professional education just in a different way. Just not better in my opinion. Anyone who takes out a government student loan should understand that it is a non-negotiable debt. They should think carefully about the amount of debt they are thinking of taking on and exactly what that means in repayment. Even if costs are reduced some and/or if rising costs are muted, the costs are already way too high and force levels of borrowing that are untenable for an increasingly large population of student loan borrowers. Colleges and, specifically, their admissions offices that have guided and continue to guide students to take on debt levels, in any profession, that are unreasonable relative the student's eventual, reasonable and presumable incomes, should be held legally and financially accountable. When this occurs, you will see change happen. Government student loans are important. Without them, I and many others would not have gotten a degree. They will continue to be important and can can serve as a motivator. Yet, for many the debt they carry isn't a motivator but an inescapable captor. Granted, something seems a little off about defaulting on a $5,000 school loan. The article alludes to the promise that those who work equally hard have an equal promise of prosperity, yet that outcome now weights heavily on the premise, "Did you or did you not have a reasonable amount student loan debt relative to your income?"

 

[deleted480308]

Society doesn't subsidize bankruptcy via government. Creditors mitigate bankruptcy risks with higher rates and lendee selection. That would work fine in education. $30k for lecom to be a doctor? Easy loan to approve. $60kyr for a degree in creative writing? Nope

Let the market determine the value of a degree, if a degree truly has an untenable cost people will stop signing up. If someone is too stupid to do a ROI on their degree, it's not my problem

 

[Lesley]

Society doesn't subsidize bankruptcy via government. Creditors mitigate bankruptcy risks with higher rates and lendee selection. That would work fine in education. $30k for lecom to be a doctor? Easy loan to approve. $60kyr for a degree in creative writing? Nope

Let the market determine the value of a degree, if a degree truly has an untenable cost people will stop signing up. If someone is too stupid to do a ROI on their degree, it's not my problem

It is my understanding the government is by far the largest student loan creditor much more so than private creditors. If the government is lending the populace's tax money and there are defaults, wouldn't this effect almost everyone? Am I incorrect? If people are unsuccessful, if people remain indebted, unable to save, it is reasonable to assume that they will not be able to support their families sufficiently, and, over time, increasing the need for public government programs. This costs the populace at large too.

 

[sazerac]

With student loan payments based on income, I don't understand how anybody defaults on a student loan anymore. Your loan payments fall with a falling income, and even go to zero if you drop below an income far above the poverty line. It's like people aren't even trying anymore.

 

[SigmaFS]

Not sure where to begin with this, but possibly a response to this line in the Atlantic article:

"This is why IBR misses the mark: because it currently doesn’t do enough to address one of the key ways student debt may negatively affect young adults, by limiting their ability to accumulate assets."

I disagree. Given the participants in this forum, IBR & PAYE typically lowers your Debt to Income (DTI) and improves your cash flow which lenders use to determined your ability to secure other debt financed acquisitions. Lesley suggested a student debt level of $500,000, so I'll use that as a point of comparison between more conventional repayment options vs. PAYE. Assuming $500k @ 7% below are the various month payments with more conventional repayment options:

• 10 year term: $5,805/month with total payments = $696,600
• 20 year term: $3,876/month with total payments = $930,240
• 30 year term: $3,327/month with total payments = $1,197,720

PAYE is primarily a function of Adjusted Gross Income (AGI). As a general of thumb, PAYE annual payments are equal to ~ 9% of AGI assuming 1 in family. An AGI of $200,000 will result in PAYE annual of $18,000 or $1,500/month, AGI of $300,000 leads to PAYE annual of $27,000 or $2,250/month and so on. Despite the fact that you have a large outstanding student loan balance, lenders measure your ability to service that debt using metrics like DTI and cash flow which leads me to disagree with that statement.

Now, PAYE creates a whole host of other issues; the forgiveness tax bomb, it encourages students to borrow more than necessary, it does not encourage school to control their costs, passes the burden of forgiveness to general tax payer, etc. Like the tax code, a complex environment.