|Passing the student-loan mess on to the next president
But a lot of student debtors don't qualify for Pay As You Earn under present regulations. According to the New York Times, Obama plans to extend eligibility to an additional 5 million student-loan borrowers, including those who took out loans before October 2007.
Is Pay As You Earn a good thing for the nation's distressed student-loan debtors. Yes it is--at least in the short term. For people struggling to pay mountains of debt under the standard 10-year repayment plan, Pas As You Earn will lower monthly payments substantially. People who are currently paying 15 percent of their income under a 25-year IBRP will be delighted to switch to Obama's more generous Pay As-You Earn program. People who are unemployed or underemployed will be particularly grateful, because if their income falls below the official poverty level, they won't have to make any monthly payments at all.
Is there a down side to Pay As You Earn? You bet.
First of all, all the income-base repayment plans remove all incentives for student borrowers to limit the amount of money they borrow. If their loan payments are based on their income and not the amount they borrow, then there is no reason not to borrow as much money as you can.
Second, Pay As You Earn and other IBRPs do nothing to slow the burgeoning cost of going to college. Colleges have no incentive to keep their costs down, because they know students will simply borrow more money to cover tuition hikes. What do colleges care if their graduates are making student-loan payments for 20 years?
Third--and most significantly, these long-term repayment plans are going to fundamentally change the way Americans view postsecondary education and the world of work. There was a time when low-income individuals worked their way through college, graduated with no debt, and entered the workforce determined to buy homes, start families, and begin the confident climb up the economic ladder.
Now, 18- and 19-year olds are going to begin college knowing that they will pay for their postsecondary education by donating some percentage of their income to the federal government over the majority of their working lives. In essence, they will become indentured servants for the government--sharecroppers if you will.
I think this arrangement will foster cynicism among the young, because they will realize on some level that they have been forced into unreasonable levels of indebtedness because colleges refuse to control their costs. They will see university presidents like NYU's John Sexton make outrageous amounts of money while they sign up for long-term college-loan repayment plans that they will not pay off until they are in their 40s and 50s.
And, since they won't have to pay anything under Pay As You Earn if they are unemployed or live below the poverty level, I think many of them will postpone going to work. Many will figure that it makes sense to travel or take low-wage jobs in exotic locales rather than seek more remunerative employment. And the incentive to work "off the books" will increase, because people in IBRPS who enter the cash economy will not only avoid paying taxes and making Social Security contributions, they will avoid making student-loan payments as well.
Moreover, once these college-going young people figure out that their payments will be based on their incomes and not the amount they borrow, they will borrow as much as they can.
I appreciate the President's efforts to provide overburdened college-loan debtors some immediate relief by offering plans to lower monthly loan payments while extending the loan repayment period. Unfortunately, in the long run, the results will be catastrophic.
In reality, President Obama is simply passing the student-loan mess on to the next president to deal with. Millions of people may see their student-loan payments go down in the short-term, but they will be significantly extending the length of their loan repayment period. Most Pay-As-You-Earn participants --I predict--won't be making loan payments large enough to cover accruing interest or pay down the principal on their notes--which means they won't really be paying their loans back at all.
And meantime--total student-loan indebtedness--now more than $1 trillion dollars--will continue to grow and grow.
Jackie Calmes. Obama Plans Steps to Ease Student Debt. New York Times, June 8, 2014, p. 17.