Tuesday, October 9, 2012

Income-Based Repayment Plans Won't Solve the Student-Loan Crisis: Reponse to NY Times Editorial

Today's New York Times included an editorial entitled "Misleading Advice for Student Borrowers." The Times correctly states that many for-profit schools are urging their students to enter so-called "default management" programs that allow students to defer payment on their loans due to economic hardship.

 As the Times rightly observed, interest continues to accrue for many students who are in loan-deferral programs. This accrued interest is added to the principal of the debt, often causing the total amount owed to grow substantially.

The Times argued that students would be better off going into income-based repayment plans (IBRPs), whereby they are obligated to pay a percentage of their income on their student loans over a period of 20 to 25 years.  The amount that remains unpaid at the end of the lengthened repayment plan is then forgiven by the student-loan creditor.

There are three problems with IBRPs. First, like the economic-hardship deferments, interest accrues on the debt for students who are not paying enough under their IBRPs to cover accruing interest. For example, an unemployed person in an IBRP who owes $20,000 in student loans would not be obligated to pay anything on the debt until he or she found a job.  Nevertheless, the interest on the student loan would continue to accrue, making it more difficult for the debtor to ever pay off the loan.

Second, as several bankruptcy courts have noted, a student-loan debtor whose debt is forgiven at the end of a IBRP repayment period may see the amount of the forgiven debt treated as taxable income by the Internal Revenue Service. 

Third, who wants to be saddled with student loan payments for 20 years? Student-loan debtors who select an IBRP as the means of paying off their debt will in essence become serfs--bound to send a percentage of their income to the federal government for the majority of their working lives.

For the Times and for many elected politicians, IBRPs seem like the easy fix to the student loan crisis.  But that is not true.  Currently, about one million student-loan borrowers are enrolled in IBRPS, and the number is likely to grow in the years to come. All these people send a percentage of their income to the federal government or its agents for at least 20 years.  And at the end of that period, they may face a tax bill for the amount of the loan that is forgiven.

No--the answer to the student-crisis for overburdened debtors is reasonable access to the bankruptcy courts--not long-term repayment plans.


Editorial. (2012, October 8). Misleading Advice for Student Borrowers. New York Times Online.

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