For my first post, I wanted to open up by talking about something that is very near and dear to my heart: student loan debt.
According to US News and World Report, about 70% of 2013 college graduates were left with an average of $28,400 in debt. According to the American Bar Association, the average debt coming out of law school is between $84,000 and $122,158 depending on whether you went to a public or private law school. As staggering as that number is, I personally know many people whose loan debt numbers are pushing $200,000, myself included.
These numbers are on the rise. The trend in recent years, and even decades, has been an increased burden on students to cover the costs of their education. Debt burdens are getting larger and larger every year as institutions become more expensive, and the cost of living rises.
The policies and rhetoric that surrounds the debate on student loan interest and repayment rates makes a lot of assumptions about what one can actually do with a degree once you have graduated. For instance, when President Obama signed an executive order in June 2014 to widen the reach of those eligible for the Pay As You Earn program of federal student loan repayment, he said that the program was intended to help undergraduates, and when signing it, said that, "If you got a professional degree like a law degree, you would probably be able to pay it off." Unfortunately, the number of law school graduates able to actually get a job right out of school is shrinking every year. So even though the widely believed assumption about the rich lawyer is still being propagated, the numbers are not really reflected in reality. More and more, the debt burden upon graduating from law school dwarfs what a lawyer is able to earn.
Student loan interest rates have fluctuated wildly in the last several decades. There was a steady decrease in the rates throughout the 1990's, hitting a low of around 4% in 2003-2004. Since then, it has been on the rise, and now we are at a level not seen since 1997, hovering around 8%. To put this number in perspective; you know those banks that nearly tanked our economy? The ones that made really bad investment decisions, coupled with shady (though mostly not illegal) business practices all in the name of profit? They currently borrow at a discounted rate of .75% from the federal reserve. Less than 1% interest. The interest rate on a home loan is around 3%. Where do they get these numbers from? What makes one type of transaction more expensive than another? Well, to put it simply, the answer is an analysis of risk versus reward.
When a financial institution, whether it is the federal reserve or a private bank, decides to loan out money, they have only a few basic concerns in mind. One: will I get my money back? And two: will I earn a profit? A loan is not an altruistic practice. It is a business, the purpose of which is to make money. The interest rate attached to a loan reflects the risk being taken in loaning money to somebody. For an individual taking a home or student loan, they look at what kind of money they are making, and how likely are they to make consistent payments. Understandably, a student will most likely not have a lot of credit history by which to build confidence, meaning their history of making payments to utilities and credit cards is shorter than, say somebody in their 50's. However, a student loan is an investment in that persons future. He or she is seeking a higher education in order to increase their earning potential.
So, is that worth anything? The promise of a higher earning professional should be attractive to a lender for several reasons. First, most people entering into college, grad school or law school are motivated, hard working people. They are choosing to pursue a higher education in order to better themselves and society. That should be viewed as a good investment. Second, the fact that they are investing in this asset which will increase their earning potential should also be considered. Additionally, it should be valued from a societal perspective. We want students coming out of college and graduate schools to be able to enter the workforce, start earning, and start investing in society. A lower interest rate would mean more money freed up in the long run to put back into the economy, in the form of consumerism, purchasing a home, or investing.
The student loan system as it stands is getting in the way of graduates fulfilling the promise of a higher education. That promise is that you can be financially stable, independent, a home owner, an investor, a titan of industry! Instead, many young professionals pay rent, put off starting families, and try to find a way to keep themselves afloat as they look ahead at a minimum of 20 years of paying back money for a degree that was supposed to make their life better. Is it right that a bank should look at a student as a potential cash cow? What is ultimately the more important part of the student loan transaction? That the bank maximize its profits or that the student receive an education and become a functioning and contributing member of society? Ideally it should be both, but a balance must be struck. Off the top of my head, I might suggest a diminishing interest rate. Meaning that as a student continually makes payments on student loans, the interest rate decreases to reflect their track record of reliability and consistently making payments. Of course, this is only meaningful if a person is actually paying back their loan in full and not taking advantage of the repayment programs offered by the government, or is simply ineligible for them. Private loans from banks, for instance, are ineligible.
You've probably heard of some of the repayment programs I am about to discuss, though it would not be surprising if you don't know too much about them. For some reason, the information is a bit hard to come by, and not very main stream. Don't ask me why, because some of these programs are pretty great, albeit kind of new and largely untested.
I mentioned the next topic above briefly: the pay as you earn program is one of several income based repayment (IBR) programs being offered by the federal government. IBR programs are pretty much what they sound like. You make payments on your loans that are capped at a percentage of your income. After a certain term of years, the remaining balance is forgiven. The most popular plan right now is Pay As You Earn (PAYE). This plan caps your payments at 10% for a term of 20 years. You will most likely pay something less than 10%, the cap merely means that you wont pay more than that. Sounds great right? It pretty much is. There are definitely a few things to keep in mind though.
First, only federal loans are eligible. If you took a private loan from a bank, you're out of luck.
Second, the amount you pay every month is attached to your income, which you must re-file with the Department of Education every year by submitting your tax returns. Therefore, the more you make each year, the more you will pay back.
Third, at the end of the term of years, if the amount you paid back is less than the amount you originally borrowed, you must then pay income tax on the difference. This makes sense, right? Otherwise, it would be that the government just gave you money tax free, and that is not how they roll. This can become a problem under the following scenario: You borrow $150,000 to go to law school. You, for some reason, make $35,000 per year for 20 years while enrolled in PAYE and your income never goes up. Your payments are somewhere around $200 per month, which is a little less than 10%; let's say it is adjusted down because you have dependents. At 20 years, you have paid a total of $48,000. You now suddenly owe the income tax on $102,000. Since you're only making $35,000 per year, that might be a problem. These numbers are unlikely, and not exact according to the calculator you can find on the Department of Educations website, but it illustrates the point.
Fourth, your spouse's income is calculated in when you file your return to renew the program every year. So keep that in mind for all you married folks out there!
Fifth, this program is untested and subject to acts of Congress. It is fairly new and nobody has been enrolled long enough to actually claim the forgiveness of the balance of a loan at the end of the 20 year term. So the way it will play out is a bit of a mystery. Plus, Congress, if they so choose, can pass a law changing the program. It is unlikely that this would happen due to the fact that people's lives and livelihoods are now intertwined with this program, and its cancellation would be devastating for those enrolled. The next point will explain why.
Sixth, Your interest accumulation and loan balance will skyrocket. This is terrifying to look upon. When you start making payments, you will see your debt balance rise and rise. This is happening because you are making payments (depending on your loan balances compared to your income) that are smaller than would be necessary to pay off a loan over a 20 year term. Let me illustrate this using my own situation. I left law school with about $160,000 in loans. Today, that number is close to $200,000. If I were enrolled in the standard repayment plan, my payments would be about $1,400 per month. Instead, under PAYE, I pay less than half of that. Which, thank goodness, because I have no idea how I would cover that payment otherwise. But think about what this means in conjunction with point five above. If Congress in a few years, or in 10 years, decided to do away with this program, I will suddenly be sitting on a debt of hundreds of thousands more than what I originally borrowed! There is a very real scenario in which my original $160,000 loan turns into $500,000 in repayment!
Seventh, it will play tug-o-war with your credit. One of the factors that determines your credit score is loan balances. A high loan balance will negatively affect your credit score, that much should be obvious. What is less obvious, to me at least, is that Congress and the Administration failed to include protections against negative impacts that this program is having on credit. It seems to me that if the program is designed in such a way that it will maintain a high loan balance for the term of years due to the accumulation of interest in comparison to the original amount borrowed, that credit scores should not be negatively affected because it is not through the fault of the borrower that the loan balance remains high. It is the way the program is structured. In fact, as long as one is enrolled in the program and making regular payments, that should improve your credit score right? Instead, the negative effect on your credit due to the high loan balance negates the positive affect of making consistent and timely payments. That seems unfair to me and counter-intuitive if the end goal is to have productive members of society contributing to the economy. The idea behind a high loan balance having a negative effect on your credit is that it indicates being irresponsible with your debt obligations. You have mismanaged your money, cannot make payments on your debt, and therefore your credit rating drops. However, that is not the situation with the high loan balances that come with this program. The opposite is more likely to be true. You are enrolled in a program to handle an overwhelming burden. Responsibly handling your debt obligations should not also come with this punishment of sorts.
Eighth, don't default! If you miss payments and default on the loan, you will be kicked out of the program. You don't want that for reasons you should be able to see by this point.
The PAYE is great because it relieves the burden of some huge, insurmountable figure. Instead, you can now think of it now as 20 years of payments, and you're done. The payments will never break your bank, and you can manage your life around it. So long as you keep up with the program and don't default. All things said and done, it is definitely a step in the right direction. I just hope it lasts.
At the end of the day, another major issue playing into all of this is the cost of an education. If school weren't so expensive, then obviously there would be less student loan debt. People like Elizabeth Warren and Bernie Sanders have been making noise about many of the issues I have discussed here, but whether they are sincere or merely playing politics remains to be seen. I for one am happy that they are even attempting to have the conversation.
In all things, people should come first. When Congress passes a law on the subject of student loans, they should be thinking of the students and their ability to borrow, learn, work, and repay. Those concerns should come before thinking about profits for the banks. The argument that the financial institutions profiting from the interest collected on student loans helps the economy pales in comparison to a financially unburdened generation of college and higher education graduates entering the work force, innovating, investing, and helping drive our country towards the future. You just can't put a dollar sign on that.
This is a runaway train, and people like to dismiss it out of hand, but the costs of education and student debt burdens need to be addressed in a very real way. While I laud the steps made with the IBR programs, there is still a lot of room for improvement, including finding a way to ensure that the program will survive long enough to fulfill its intended purpose. I fear for the possibility of the program crumbling due to not enough people understanding its importance, or it getting dragged through the political machine. My only hope is that there are enough people enrolled in it that the potential fallout of terminating the program would be devastating enough to prevent that from happening.
In the words of Thomas Jefferson, "An educated citizenry is a vital requisite for our survival as a free people." We need to value education in this country for its potential to better humanity, and not for its monetary profitability. I find the very term "for-profit colleges" to be sickening, not to mention their abusive, corrupt, heartless, greedy business practices. And yet, any time education is discussed in Congress, or the issue of student loan debt is raised, it is the voices behind these institutions that are the loudest. Those that care only about profits, at the detriment of us all. Because even though today it is only the indebted students and former students that are hurting the worst, give it some time, and the rest of us will feel the effects in years to come, as society around us continues to take the shape of one that cares more about profits than people. We will see it, as we slowly but surely allow the power in this country to be placed in the hands of those that would rather see a profitable enterprise, than an educated, capable, and progressive populace. This is a complicated issue, and I don't have the answer, but what I do know is this: people should come first. And as of right now, they sure don't.
