Saturday, May 9, 2020

Income-Based Repayment Plans for Student Debtors: Flushing Money Down the Toilet

Congress has been dropping "helicopter money" into the national economy--adding significantly to the national debt, which now exceeds $25 trillion.

That's a lot of money for our grandchildren to pay back. My own grandkids are ambivalent about this situation. My four-year-old says he thinks he can do it if his dad will increase his allowance, but my six-year-old doesn't think it's fair for him to pay for his ancestors' wars in the Middle East.

Now let's look at another economic crisis our grandchildren will pay for--the federal student-loan program.

According to the U.S. Department of Education's own numbers, approximately 43 million Americans have student-loan debt totaling $1.5 trillion.  And, if DOE can read its own balance sheet, it will see that it has basically given up on collecting about a third of that debt.

As of the first quarter of this year, 8.1 million student borrowers are in income-driven repayment plans (IDRs). By the very terms of those plans, these borrowers make loan payments based on their income, not the amount they borrowed. Under most of these plans, borrowers at similar income levels make the same sized monthly loan payments regardless of whether they owe $20,000, $50,000, or $100,000.

Virtually everybody in an IDR is making payments so low that the underlying debt grows larger due to accrued interest--interest that is capitalized.  In other words, virtually no one in an IDR is going to pay off his or her student loans.

How much money are we talking about? DOE's recent report tells us that a half-trillion dollars ($507 billion) are owed by people in IDRs.  In fact, 400,000 people in IDRs owe $200,000 or more.  And--inexplicably--300,000 student debtors are in IDRs who owe less than $5,000.

As Education Secretary DeVos publicly acknowledged in late 2018, the federal government carries student-loan debt on its books as performing loans, which a commercial bank could not do. In fact, she made the astonishing admission that outstanding student loans make up 30 percent of all federal assets!

But in fact, at least 8.1 million student loans are not performing. On the contrary, the IDR programs were designed in such a way that borrowers never pay them back.  

Education Secretary Betsy DeVos announced last year that she was hiring McKinsey & Company, a private consulting firm, to determine just how big the student-debt debacle really is.  So far, she has released no report.

But we don't need a high-priced consulting firm to tell us what is going on. The student-loan program is bankrupt. And while Betsy DeVos sails along on her private yacht, DOE lawyers are hounding desperate student-loan borrowers through the bankruptcy courts, demanding that they be put into IDRs. Those IDR plans can last for as long as a quarter of a century, and virtually no one in such a plan will ever pay off their student-loan debt.



References

Ferguson, Adam. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. New York: Public Affairs Publishing (2010) (originally published in 1975).

1 comment:

  1. The IDR program was in part an effort by the Obama administration to reduce the number of students in a hideous situation regarding monthly debt payments.

    In effect it put a bandaid on the problem. Hopefully at some point we will terminate the IDR's and have debt forgiveness.

    ReplyDelete