<p>Certainly something to take advantage of.
Student</a> Loan Borrowers Leaving Lots of Money on the Table</p>
<p>It does bother me that I , as a tax payer, will be eating your loan balance.</p>
<p>Sorry if this has already been posted</p>
<p>It’s not so rosy as the author makes it out.</p>
<p>First off, the borrower has to make some interest payments for 20 years. And in some/many cases, that will be interest only, so the principal will remain.</p>
<p>Second, with rare exceptions, the debt forgiveness becomes taxable income in the year that it is forgiven.</p>
<p>So after running numbers, there is not much of a free lunch.</p>
<p>I, as taxpayer, would rather eat your loan balance than pay for wars, Exxon tax breaks, Walmart tax breaks…like those that allow Walmart to buy everything from China, yet pay such low wages and few hours that said employees also use my tax dollars for food stamps and Medicaid. THAT’S criminal. (on Walmart’s part, not the employees).</p>
<p>It’s complicated. Our family sacrificed, H works two jobs, as do I, we saved up for our kids’ educations, and our kids will have no debt. Does that mean I think everyone can do this? No. I see kids in HS every day who work their butts off to get into UC or CSU’s, but college is so expensive they can’t go or never finish. So, if this repayment plan allows them to go to school, then work and pay taxes, as well as pay off some of their loans, that’s fine with me, if, at the end of 20 years, there is some left over to be absorbed by the taxpayers. That, to, me is a good investment. </p>
<p>On the other hand, I do have a problem with families (many here on CC) who whine about how they “don’t qualify for need-based aid” because they make too much $, but somehow can’t pay a dime for their kid’s school. Sorry, I don’t buy it. In many, but not all cases, they could have bought a smaller home, gone camping instead of big vacations, bought used cars… So, yes, I get not wanting to absorb their kids’ loan payments!</p>
<p>I am hoping, however, that there is some limit to the amount borrowed. It is criminal to allow students to borrow hundreds of thousands of dollars without any thought to income.</p>
<p>The math in the example they give is off base. The articles says:</p>
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<p>If you run the IBR calculator using a $40,000 income, $70,000 debt, 7.9% interest rate (which is the current rate for graduate PLUS loans) - you get a monthly payment of $291. Over 20 years, that comes to $69,840 – pretty closes to the actual debt amount. And that’s without adding in the hypothetical 2.5 percent annual increase. I realize that AGI could be less than $40K with deductions – but the article didn’t posit a lower AGI, and in any case it is rather unlikely that a person is going to stay at the same $40K position for 20 years. </p>
<p>Keep in mind that the flip side of the coin is that the debt is not dischargeable in bankruptcy. So down the line, the government is still collecting payments from a significant fraction of people who would otherwise go into default. IBR is also a strong deterrent to default, because to qualify, the person needs to stay current on loan payments to continue to get the reduced rate, and to qualify for loan forgiveness at the end of 20 years. </p>
<p>The alternative is that the students who potentially are the most productive and highest earning of the coming generation (those with graduate and professional degrees) are so saddled with debt that they cannot afford to buy homes or make other investments – and that of course depresses the economy for years to come. </p>
<p>As those loan payments are all going to the federal government under the direct lending program, they work as a kind of post-college tax on students who needed financial aid to get their degrees. </p>
<p>Since the government also has a societal interest in building a healthy, thriving economy – it makes sense as a policy to essentially forgive the loan in some cases for students who have not managed over the years to see their earnings keep up with their expectations at the time they were in college. I say “some” because the majority will not qualify for IBR over the years because as they get promoted to higher salaries, they will eventually hit a point where they are making too much money to qualify for a reduced payment. So over time, on average, IBR is going to help students in the early years of their careers and if they run into hard times, but the vast majority will not qualify for the reduced payments for the majority of their careers. </p>
<p>The group with the greatest potential benefit are those who go into public service jobs, with lower pay, and the possibility of loan forgiveness after only 10 years. But then that simply amounts to a government subsidy for those who are giving back to society and the government through their work – so the government & society is still benefiting.</p>
<p>in re. comment #3: say amen, somebody!!!</p>
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This is definitely a problem that many are facing as they face the prospects of graduate school. When I went to law school, as an in-state resident of a public university, I paid roughly $750 a year in tuition. That same law school now charges in-state residents $48,000 a year; nonresidents pay an additional subsidy. (Obviously neither of my kids will be going to law school) </p>
<p>So how to pay for that? Keep in mind that the state needs lawyers to become the future prosecutors, public defenders, city and county attorneys, judges, administrative hearing officers, etc. </p>
<p>Unfortunately I think that the IBR is functioning as the safety-valve that allows the system to keep running. It’s essentially a type of cost-shifting. Obviously the taxpayers of my state paid a big chunk of the costs of my law school education – even in 1975 dollars it must have cost the university considerably more than $750 per year per student to pay its faculty and operational costs-- but in 2013 the costs are being shifted to the federal government (which writes the loans); then to the student (who make the payment); and in the end back to a future generation of federal taxpayers (which shoulders the cost of forgiven loans 20 years hence). Of course that future generation is the SAME generation who are entering college and grad programs right now – so basically, one way or another, we’re shafting our kids.</p>
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<p>Not for grad school. Many of today’s law students are facing close to $300k in debt when they graduate three years hence, and the job prospects are poor, at best.</p>
<p>It may or may not be a great deal but I think that 20 years is long enough to be in debtors prison.</p>
<p>^^I agree with that and with some kind of limit on the amount borrowed!</p>
<p>I agree with somporanomom, but I would add that what is criminal is charging a usurious interest rate of 7.9%. If the IBR effectively reduces that rate to something more realistic, fine with me.</p>
<p>You could go for a private loan – but I think you’d find it difficult to get a good fixed rate of interest for an unsecured loan without current employment and a strong credit history. A flexible rate could go sour on you over the years if interest rates rise.</p>
<p>An alternative approach would be for the government to set a flexible student loan rate that is tied to the market (for example, 1% above prime) – but also set a cap (say 5 points) based on the starting rate of interest. Then you might be in the situation of signing on for a loan at 4%, knowing your rate could go up, but that it would never be more than 9%. That’s how it used to work – my first parent PLUS loan was taken in 2001, and the interest rate varied from year to year. It ended up pretty low so I prioritized paying down later, fixed rate loans. </p>
<p>But do keep in mind that the interest rate is tied to a benefit – in this case the IBR plan as well as other provisions for loan forbearance, deferral, or forgiveness that you wouldn’t have with a private lender, whatever the interest rate. It’s fairly typical with any loan that there is an offset between interest rates and particular benefits – for example, on a home loan you can pay more points at the outset to lock in a lower interest rate. </p>
<p>I’d point out that graduate loans are not subsidized, so interest starts to accrue right away. So that’s just one more way that the government is getting a benefit that offsets the potential benefit to the student with the IBR provisions. </p>
<p>I do find the whole thing depressing, as my daughter was looking at taking on loans in a rather scary amount for grad school. (Fortunately, she’s now secured some funding that will reduce her likely loan debt to something far more manageable). But we definitely have had to take a long and hard look at these issues.</p>
<p>After much consideration, we decided to take out a HELOC and loan S the money for grad school ourselves, and set up a regular repayment plan. With the lower interest rate, plus tax benefit, he will end up paying at most half the interest rate available for PLUS loans. Another advantage is that he can draw the money only as he needs it, so if any of the scholarships he has applied for or part time work that enables him to cover some of his expenses come along, he can incur less debt.</p>
<p>Of course, this is comparatively feasible for us because he is an only child, so there is no question of sibling unfairness. And, of course, we have a reasonable amount of equity in our house.</p>
<p>What would happen if your son was unable to make payments to you? Would you be able to shoulder the loss? </p>
<p>Back when I practiced law, some of the saddest cases I had to deal with where when parents had lent considerable money to a kid, and down the line the kid stopped paying and also broke off contact with the parent. (In the case that comes to mind, the kid had subsequently married – I don’t remember if there were also grandchildren in the picture).</p>
<p>My basic rule of thumb is never to “lend” money to a family member unless my true intent is to give it. That is, if you are willing to shoulder the cost of your son’s grad school, but want him to have some skin in the game – so you lend him money with the idea that it’s your debt, but you might get lucky and get the money back from him – great. But if there could be a time down the line that his failure to pay jeopardizes your economic well being – then you’ve incurred a risk-related cost that may be much greater than the potential savings in interest. </p>
<p>You wrote: “Another advantage is that he can draw the money only as he needs it, so if any of the scholarships he has applied for or part time work that enables him to cover some of his expenses come along, he can incur less debt.”</p>
<p>A student can do that with a PLUS loan as well, as long as they draw what they need by the end of the school year. I know that my son signed a promissory note for PLUS loans this year (first year of grad school) – but as of the middle of the year he hadn’t taken any of the loans. In other words, he set things up so that if he runs short of money, he’ll be able to go to his university financial aid office and get a distribution fairly quickly, but he hasn’t incurred any debt so far. </p>
<p>It’s also important to keep in mind that no matter what the interest rate is on paper, the person can still pay off a loan early or make extra payment to principal, reducing the overall costs. This thread is about the situation where the student isn’t earning enough to make the minimum payment on their loans (IBR) – but the flip side of that might be student who has taken on modest debt (say, $20,000) and ends up with employment that pays well enough to allow the student to pay debt down more quickly. </p>
<p>I’m not denying that the PLUS interest is very high right now compared to what you can get on a HELOC. But I’d rather pay off my house so that I don’t become a burden on my kids in my old age. The advantage of the IBR program is that I know my kids will be able to service whatever debt they have.</p>
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<p>I believe that that rate is kept higher to subsidize the Pell program. </p>
<p>Regardless, I disagree that the 7.9% is usurious. The simple fact is that most grad students are unemployed, and many will remain so after they graduate. That, to me, seems like a large risk, worthy of a risk premium. (yes I realize that the loans are not dischargeable, but they should be, IMO.)</p>
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<p>Yes, otherwise we wouldn’t do it. (We’re not talking law or medical school level debt here.)</p>
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<p>To some extent I agree, but when H and I were first married my parents lent us $30K for a down payment on our first house. We established a payment plan based on a rate of interest that was high–12%!–but actually slightly under the market rate then. We paid them just like we paid our mortgage, and in fact paid it off with a lump sum after a few years. So we model our offer to him on that. I expect him to pay it back, but if we decide eventually to forgive part of the debt, it won’t ruin us, and since he is our only child, it would affect only his inheritance. I agree, though, that in general one should never loan anyone any money that one cannot afford to lose. (I’ve seen more than one person get screwed by “taking back financing” on a house or business, for example.)</p>
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<p>Yes, we pointed that out to him. 
I plan to encourage him to try to begin paying it down well before the draw period ends, even if it is only a little bit at a time. We’ll still be paying off our house at a fairly rapid rate.</p>
<p>I was encouraged that when we made this offer to S, his first reaction was not to say “Great! Free money I don’t have to pay back!!” but to ask whether it could have any negative financial consequences for us, whether we could find ourselves in a bind without that sum. He takes it seriously.</p>
<p>Re usuriousness: When the 7.9% was set, market rates were higher than that and it was a good deal. Now the reverse is true. I think that a variable rate would make the most sense, with the usual caveats that the rate can only change by X% per year and the overall change can only total Y%. But they did away with the variable rate student loans for some reason. I agree that the loans should be dischargeable, but they aren’t, so one must deal with that reality.</p>
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Well, there was a time in history when people were still afraid of rates going up. Hard to remember, I know. The problem is that variable rates are a good deal when interest rates are falling, a bad deal when they are rising. If we are looking 10 or 20 years down the line, then interest rates are certain to rise. How much, I can’t say – but the reason for that certainty is that they pretty much have hit rock bottom right now.</p>
<p>In a rising interest market, then variable rate student loan interest could be a real “gotcha” situation, because the monthly payment would be reset along with the interest.</p>
<p>Also, if loan rates were variable, it might lead colleges and grad schools to increase their tuitions even more, in much the same way that low interest rates support rising home prices. My kids and yours would be responsible, but someone else out there would decide that they could afford to borrow $200,000 at 3% interest, and then run into trouble when they found themselves saddled with loans at 8%. </p>
<p>And of course, those would be the borrowers that would benefit the most from IBR.
So it may be that there is value to the government to have interests set right now at a rate that will give some borrowers pause.</p>
<p>I do agree that the loans should be dischargeable, but I think that the IBR coupled with other circumstances allowing for loan deferral, forbearance, or forgiveness has essentially the effect of allowing the student to get relief without having to go through bankruptcy. I do at least one person whose IBR is set at 0 - and essentially they get “credit” for all those months they stay current at 0. Of course as soon as that person starts earning more money, then the IBR will go up. </p>
<p>In other words, IBR means that no person will ever have to declare bankruptcy solely because of the burden of government backed student loans. (Private loans are another matter --they never should have been exempted from bankruptcy provisions). There could be a situation where someone is overwhelmed by other debts – but its hard to imagine how any amount of federal direct loans by themselves would be burdensome enough to warrant bankruptcy, with the 10% IBR limitation. </p>
<p>Keep in mind that the situation you posited really is one of parents pay vs. kid takes loan. You may be using your HELOC, but the money came from you and from your assets and credit. If you just look at it is the student standing on their own – then I do think they would have a tough time getting the financing, and the rates would be significantly higher. I mean, what does your credit card charge for interest these days? It’s a mistake to compare the rates for secured vs. unsecured loans, as those are very different markets.</p>
<p>Why not make the initial rate of the loan vary with interest rates, but once the loan is taken out it becomes a fixed rate? Set the maximum rate at 7.9%, and if market rates drop below that allow students to take out their loans at the prevailing rate.</p>
<p>Also, if we’re going to say graduate loans are risky because of low repayment rates, shouldn’t then the rates be set based on a likelihood of repayment? For example, a MS in CS would get a better rate than the MS in Underwater Basket Weaving.</p>
<p>It’s seemed amazing to me that I can get a mortgage on a house nowadays for a lower rate than my student loans (only ~$20k at 6.8%). To me, it seems like there’s a much lower chance of me defaulting on my student loans versus the mortgage, since my loans aren’t dischargable in bankruptcy, and I can’t just walk away from them unlike a house.</p>
<p>Yes, but the bank can sell your house racin and recoup some or all of its money.</p>
<p>Again, some of the higher rates on grad students loans are used to offset the costs of the Pell program. (It is a cross-subsidy with grad students subsidizing undergrads. Whether that is good policy is another question.)</p>
<p>RacinReaver, the mortgage is secured debt. Secured rates are always less than than unsecured debt. </p>
<p>“Secured” means that the mortgage company owns your house until you pay them off. If you fall behind in payments, they can take away your house and kick you out. Same is true of a car loan. That’s what foreclosures and repos are all about, and that’s why mortgage lenders typically will not lend more than a certain percentage of home value. They want to know they can get their money when they force the sale of your home.</p>
<p>As to the policy question: I don’t like the particular system, but I understand that there is a tradeoff. The PLUS loans allow students to borrow the full cost of attendance – that can be a lot of money depending on the choice the student makes. That’s why my daughter was contemplating taking on $75K in loans for grad school. I was not at all happy that she was looking at that sum, but I can see that the PLUS loan system gave her that option.</p>
<p>She is looking at a professional degree. She has the option of getting the same degree from a lesser ranked, public university for far less money – but she feels that her earning capacity is better with the degree from the more highly regarded private U. She made inquiries – that is, she looked at current hiring practices among target employers, and she probably is right that a degree from $$$ U. means a job that pays $$, whereas the degree from $ public U leads to a job that pays significantly less. So if it will make a $10K or $20K difference in starting salary, what is the better economic decision? Are you saving money by avoiding debt if the tail end cost is a 20% overall loss in lifetime earning capacity? (Obviously, you never know, but that’s the mental gymnastics that go into these decisions).</p>
<p>I see our country developing a dual track educational system – one for the rich and one for the not-rich. My daughter has monied friends from undergrad who went straight onto grad school, with parents writing the checks. The other kids took jobs when they graduated, worked several years, and are now applying to grad programs and trying to figure out how to foot the bill. </p>
<p>The federal government gave my daughter several thousand dollars outright for undergrad (she qualified for partial Pell grants some of the time), and the federal government provided her almost another $20K in subsidized loans… now there is nothing else free coming from the government, but they are willing to lend her whatever she wants to go to any graduate program she chooses… Their interest rate is pretty high, but they are telling her at the outset that they will work with her down the line to make sure that the payments aren’t manageable. She’s got excellent credit, but I’m guessing that the interest rate on her credit card is at least 16% so probably not such a good idea for college financing. Plus her credit limit is a lot less than the $75K the US Government is willing to authorize. </p>
<p>So I don’t see the system as being all that unfair. It probably isn’t the system that I’d come up with for college financing. But I think it’s unrealistic to gripe about the interest rate on the student loans when the economic reality is that there is not a better market rate available. Yes, you can get a home loan for under 3% – but no private lender is going to give my 25 year old daughter $75,000 to attend grad school on terms that are better than what the government is offering. So to talk about a lower interest rate is pie-in-the-sky. It doesn’t really exist in that market. </p>
<p>As it turns out, my d. won’t have to borrow nearly that amount. However, the point is that, the current system gave her the CHOICE. She isn’t consigned to a lifetime, lower track career path simply because her parents aren’t rich. It was a scary choice, and not an easy choice – but it was still a viable OPTION for her. </p>
<p>I understand that the “lifetime, lower track career path” is not necessarily true, and that many graduates of lower tier, lower cost public u’s also have successful careers. I made all of those arguments to my daughter while trying to talk up the benefits of the lower track, less expensive degree path. But I also see her viewpoint. Again, not an easy choice.</p>