I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.
Scarlett O'Hara, Gone With the Wind
President Obama has shown a commendable concern about the rising cost of attending college and the rising student-loan default rate. Unfortunately, the President's proposed solutions don't go to the root of the problem.
Yesterday's New York Times reported that the U.S. Department of Education is going to contact student-loan debtors who are in danger of default and urge them to consider a variety of repayment options--including "Pay as You Earn."
DOE's "Pay as You Earn" program allows student-loan borrowers to make loan payments based on a percentage of their income over a period of 20 years. At the end of the repayment period, the remaining balance on the loan will be forgiven.
Scarlett O'Hara would approve. As she famously said in Gone With the Wind, "I won't think about that right now. . . I'll think about that tomorrow." Pay as You Earn simply "kicks the can down the
|I'll think about student loans tomorrow|
Education Secretary Arne Duncan thinks extended repayment programs will help prevent student-loan defaults, and he may be right. Admittedly, allowing student-loan debtors to make income-based payments over 20 years instead of fixed payments over 10 years will allow borrowers to make smaller monthly loan payments. But here are the problems with the program.
Most Pay as You Earn debtors will never pay off the principal of their loans. By design, the program allows people to make loan payments based solely on their income, and for many debtors--probably most of them--those payments will not be enough to pay down the principal of their promissory notes. Under the plan, people who are unemployed or who have very low incomes may pay nothing on their loans for several years. Meanwhile interest will continue to accrue, making their debts grow larger.
Right now, 1.6 million student-loan debtors are participating in some kind of income-based repayment plan. I think it is safe to predict that at least a million of those people will still owe on their loans when their 20-year or 25-year repayment plan comes to an end.
In essence, Pay as You Earn debtors are indentured servants to the government. Second, requiring people who attended college to pay a portion of their income for 20 or 25 years turns those people into 21st century indentured servants. They will be sending a portion of their income to the federal government for a majority of their working lives. Who thinks that is a good idea?
Income-Based Repayment Plans eliminate people's incentive to borrow as little money as possible to attend college. Obviously, if students' college-loan payments are going to be based on a percentage of income regardless of the amount borrowed, then it makes sense for students to borrow as much money as possible.
Not only will the program eliminate the incentive to minimize student borrowing, it will also reduce the incentive for colleges to keep their costs down. Who cares how much college costs, if student-loan payments are going to be based solely on an ex-student's income?
Pay as You Earn will likely increase red tape and bureaucracy. Pay as You Earn and other federal income-based repayment programs will likely create a giant bureaucracy that will require the
government to adjust people's loan payments on an annual basis based on changes in income, periods of unemployment, and other factors.
The federal student loan program is already nearly incomprehensible to many student-loan debtors. I fear this program will balloon into the educational equivalent of Obamacare and Social Security and will require mountains of paperwork and bureaucratic red tape to administer. Is this the future we want for our college graduates?
Conclusion: It's time to face the music. It is time for the Obama administration, government policy makers and the nation's universities to face the music. The federal student loan program is a catastrophe. Like a drug addict, our universities have become hooked on federal student-loan money, which they rely on to survive. Thus, we cannot eliminate the program overnight; or our loan-dependent universities will go into toxic shock.
But we can gradually begin dialing this program down. First, let's kick the for-profits out of the federal student loan program. That would shrink the cost of the program by about 25 percent and reduce the number of loan defaulters dramatically. Of course, most for-profit colleges would be forced to close. But that's OK; the United States can get along just fine without the University of Phoenix.
Second, as I've said repeatedly, we have to allow truly distressed student-loan debtors to discharge their loans in bankruptcy, so they can get a fresh economic start.
Third, we need to encourage more low-cost community colleges to do what some have already done--get out of the student loan program altogether. Wouldn't it be a good thing to offer low-income students low-cost options for attending college--options that would not require them to assume crushing debt just to get an education?
But so far, the higher education industry and the federal government want to prop up the status quo.
No one wants to confront the enormity of the problems that were created by the federal student loan program. Like Scarlett O'Hara, we've decided not to think about that right now. We'll think about that tomorrow.
Tamar Lewin. U.S. to Contact Borrowers With New Options for Repaying Student Loans. New York Times, September 25, 2013, p. A20.