New approach to financing education

Paying for College
1

<p>I have often wondered about the effect that repayment of student loans has on the overall economy. </p>

<p>Student loan repayments now act more as an "expense" rather then as repayment for the purchase of a capital asset. By this i mean that student loans are repaid relatively quickly, during the early work years of the borrowers career (when the borrower is cash starved) and when the borrower has tremendous pent up demand for "stuff" (cars, work clothes, furniture, etc.). </p>

<p>For many borrowers, the huge monthly payments means delaying purchases of this "stuff." Recent studies support the notion that recipients of student loans have reduced consumption of "stuff" (including homes) so that the student loans can be serviced. At the same time, the economy is suffering from a lack of demand for products it has the ability to produce. Increasing demand, met with increasing supply, increases employment, increases tax revenues (without raising marginal rates) - a virtuous cycle.</p>

<p>But, if student loans were treated as a loan to create a capital good (the working career which extends for many decades), and repaid over a substantially longer term (think of the differences between the term of an auto loan and a mortgage), the amount of the monthly payment will drop dramatically. (I am arguing for an extension of time, not a decrease in interest rates. Many of us older ones remember when car loans used to be two or three years in length; now, to keep payments down, loans are five years.) That results in improved cash flow for the recent grad. That improved cash flow means income can be devoted to purchasing some "stuff" which helps the economy by increasing demand. (By creating more demand, theoretically, more jobs are created - perhaps even a better job for the recent grad.)</p>

<p>Obviously, the student loan conundrum is complex and has many facets. Recently, Oregon has floated some interesting ideas about upper education financing. Now the NY Times has written about several alternatives to traditional student loans:</p>

<p><a href="http://www.nytimes.com/2013/07/20/your-money/unusual-student-loan-programs-link-to-future-earnings.html?pagewanted=all&_r=0%5B/url%5D"&gt;http://www.nytimes.com/2013/07/20/your-money/unusual-student-loan-programs-link-to-future-earnings.html?pagewanted=all&_r=0&lt;/a&gt;&lt;/p>

<p>I am not arguing that student loans are bad or good; nor am I asserting that a student should find cheaper college alternatives; nor do I even care which majors are pursued and which majors are more conducive to higher starting salaries. What I am asserting is that viewing a college degree as an investment in the future and lending on that basis (long term using the length of a average career as a basis) is better for everyone then treating student loans akin to car loans (high payment, relatively short term). </p>

<p>Now, it seems, there are are some alternatives emerging.</p>

2

<p>Isn’t Oregon thinking of doing something like this? IMO, I would not want the loan hanging over my head for long periods of time. Who wants that monthly expense in addition to the expense of kids, a mortgage, car loan, etc.</p>

3

<p>A better approach would be for taxpayers to restore the subsidies that kept public education affordable.</p>

4

<p>^in this politically toxic environment, where neither party seems to believe in compromise, restoring subsidies seems like wishful thinking. It seems we tend to focus on the crisis de jour without evidencing any ability to think 20 years down the road (where a highly educated workforce would prove its worth).</p>

<p>As for the preference not to stretch out payments, that is not an unreasonable position; but someone could always accelerate payments - just the same as a borrower can pay off a mortgage early.</p>

<p>College grads have an unemployment rate almost 1/2 of the unemployment rate of the entire U.S. workforce. Some college grads may begin their work in a low paying relatively unskilled job, but as they pick up work and life skills, pay increases. Slamming these borrowers with payments that substantially impair their ability to consume - and we are a consumer driven economy - harms all of us, not just the struggling borrower. </p>

<p>What if you were forced to pay your mortgage in 15 years? You would have far less discretionary spending. Now, some people get 15 year mortgages; but most don’t (one size does not fit all). If all mortgages were 15 years, however, the hit to the economy would be considerable - due to decreased consumer spending.</p>

<p>Savings and preparing for future expenses (house, kids, kids education) is laudable. But the expected length of time a person is a part of the workforce means that major costs can be spread out over the length of the time a person is working.</p>

5

<p>There are already extended loan repayment plans for Direct Loans available, allowing borrowers with Direct Loans exceeding $30K to take 25 years to pay off the loans. Are you suggesting repayment plans that extend beyond 25 years? The problem really seems to be the amount of loans taken out in the first place, isn’t it? And the ease by which students are able to take out school loans, and even use these loans for their daily living room/board expenses without working part-time jobs and cash-flowing as much of their college education as possible?</p>

<p>Sure, doesn’t everybody love lower payments - when people buy cars, they get fixated on the monthly payment, without considering that paying off a car over 7 years versus 3 years means they get to throw away at least 2-3 times their money in extra interest. Better for them to have purchased a cheaper car that they could have afforded to pay off in 36 months. Even better to have paid cash for a reliable clunker and wait to get a better car when finances allow. College students should not be driving around brand new, financed cars.</p>

<p>For a student with $40K in 6.8% student loans, paying the loans off in 10 years means paying $15K in interest with a monthly payment of $460. In exchange for a lower payment of $277 spread out over 25 years, the student will end up paying $43K in interest. What is the opportunity cost lost on paying that extra interest rather than actually investing those dollars? </p>

<p>[Repayment</a> Comparison Calculator | Federal Student Aid](<a href=“http://studentaid.ed.gov/repay-loans/understand/plans/standard/comparison-calculator]Repayment”>http://studentaid.ed.gov/repay-loans/understand/plans/standard/comparison-calculator)</p>

<p>I am sure lenders would be more than happy to offer extended loans to everyone, because that just means more money for the lenders, but do we want lenders making that kind of money off of school loans? Just look at the credit card industry for some guidance. Do we want to encourage students to lock themselves into 25-year repayment plans?</p>

<p>At least with a car or a house, you have something tangible that you can sell if you get into a financial jam and need to sell and get out from under the loan payment. With a house, there is the possibility of having some equity somewhere down the line. With an education, yes, the student benefits, and it is an investment of a sort, but it is not an investment that makes sense for a lender, or for the taxpayers who subsidize many of these school loans.</p>

<p>College tuition would not have skyrocketed at a rate far exceeding inflation over these last two decades if school loans were not so easy to obtain. Thankfully, there are still affordable options out there for students who don’t like the idea of being a debtor for the majority of their adult lives, including attending community colleges, living at home while attending universities and not financing living in the dorm and eating cafeteria food, working while attending college, and choosing to pursue degrees that are rewarded in the marketplace with employment and salaries more than sufficient to handle school loan payments.</p>

<p>I think all prospective college students intending to take out federal loans should be required to take a financial literacy class before they get one dollar of student loan aid. If more college students, and their parents, fully understood the true cost of accepting all of that easy financial aid, they could at least sign on the dotted line fully aware they are signing away a good chunk of their future income. Too many students go into this blind and ignorant, and then graduate and go into shock when their first loan payment comes due six months later (the reason so many students then decide to go to grad school and then take on more debt.)</p>

6

<p>Actually, my son’s cc does require that you take a class before they will disburse loan funds.</p>

<p>Regarding the worth of an educated work force, there was a good column on the Des Moines Register’s opinion page today regarding that:
<a href=“http://www.desmoinesregister.com/article/20130722/OPINION01/307220022/Another-View-Why-the-GOP-wants-to-tax-students-but-not-polluters?Opinion&nclick_check=1[/url]”>http://www.desmoinesregister.com/article/20130722/OPINION01/307220022/Another-View-Why-the-GOP-wants-to-tax-students-but-not-polluters?Opinion&nclick_check=1&lt;/a&gt;&lt;/p&gt;