Student loan rates are going up--compounding misery for suffering college borrowers

James Carville, who was once President Bill Clinton's political strategist, famously remarked: "It's the economy, stupid!"

But Carville's one-liner needs updating. For student-loan debtors, "It's the interest, stupid!"

And student-loan interest rates are going up. For undergraduate student loans, the rate has risen to 5.05 percent, a 13 percent increase over current rates.

For graduate students, the rate rose to 6.60 percent, up from the last year's rate of 6.0 percent.

And rates for Parent PLUS loans are going up as well. As of July 1, the interest rate on Parent PLUS loans is 7.6 percent.

A Forbes article suggests the increase is no big deal. An undergraduate who takes out $10,000 in federal loans this year will only pay $349 more over ten years than under last year's interest rate. That's less than three bucks a month.

But let's think again. Interest rates on student loans are pretty damn high; why should they go higher? Students taking out federal loans to finance their college education pay a higher interest rate than they would for a car loan or even a house loan. And remember, the current interest rate on a 10-year government bond is only 2.85 percent. So how does the federal government get away with loaning money to students' parents at an interest rate of 7.6 percent?

Here's the real problem with interest rates on student loans: the interest compounds on outstanding loans until the loans are paid off. For some student debtors, interest on their student loans compounds while they are in school, which means they will owe more money than they borrowed by the time they graduate.

Even more concerning, millions of borrowers don't find good jobs after they graduate and are unable to immediately start making their monthly loan payments. This forces them to apply for economic hardship deferments, which are notoriously easy to get. But borrowers whose loans stay in deferment for two, three, four years or more will see their loan balances go up markedly.

And the story is the same for people who enroll in 20- or 25-year income-contingent repayment plans (ICRPs). Almost all these folks are making monthly payments so low they are not paying down accrued interest. Consequentially, their loans are negatively amortizing, which means ICRP participants are seeing their loan balances get larger with each passing month, even though they are making regular monthly payments.

Remember Mark Meru, the dentist who borrowed $600,000 to go to dentistry school and now owes a million dollars? He's in an income-based repayment plan that set his monthly payment at less than $1,600.   But interest is accruing at the rate of almost $4,000 a month. By the time he finishes his 25-year repayment plan, Dr. Meru will owe $2 million!

Albert Einstein observed that compound interest is the eighth wonder of the world. People who understand that earn it; and people who don't understand, pay it.

Apparently, millions of college-educated Americans don't understand compound interest. Otherwise, they never would have allowed themselves to get into debt so deep due to student loans that they will never pay off.

"It's the interest, knuckleheads!"

References

Zack Friedman. Student Loan Rates Will Rise 13% This Summer. Forbes.com, May 22, 2018.

Josh Mitchell. Mike Meru Has $1 Million in Student Loans. How did That Happen? Wall Street Journal, May 25, 2018.

The New American Serfs: Student-Loan Debtors in the Federal Income Contingent Repayment Plan

Slavery in the United States ended with the Civil War, but slavery in another form lived on.  Slavery was replaced by a new kind of bondage, whereby tenant farmers and share croppers basically became serfs to their landlords and were as bound to them as if they were still human chattel.  The age of the share cropper and the tenant farmer did not end until the Great Depression, when the rural poor fled the land and migrated to the cities or to California.

But those days are over, right? No one in the United States is a slave or an indentured servant in the 21^st century. 

Sadly, our national government has created a new form of bondage, which it imposes on college students who participated in the federal student loan program but can’t pay back their loans.  Some of these former students are burdened with student-loan obligations for decades--hounded by the loans they cannot repay and the accumulating interest on their debt. Some of them have become true indentured servants--bound to pay a portion of their income to their federal student-loan creditors for a majority of their working lives.

The Disturbing Case of In re Stevenson

If you think I have overstated my case, you should read In re Stevenson (2011), a recent decision by the U.S. Bankruptcy Court in Massachusetts. Janice Stevens took out two student loans in 1983 to obtain additional education beyond her bachelor’s degree. She took out a third loan in 1987 and another in 1992. By 2008, when she filed for bankruptcy, Ms. Stevenson was in her mid-50s, and her total indebtedness was approximately $112,000, including accrued interests and costs.

Ms. Stevens filed an adversary proceeding in bankruptcy court, seeking to have her student loans discharged on the grounds of undue hardship.  Most people would think she had a pretty good case. Although she had held good jobs over the years, she had suffered periods of joblessness and homelessness and had sometimes lived in homeless shelters. In addition, Ms. Stevenson had health issues--back problems, high blood pressure and an autoimmune disease that required her to take medicine.

During the bankruptcy proceedings, Ms. Stevenson held a part-time job at Walgreens, earning less than $500 a month. She supplemented her meager income with unemployment checks, which were scheduled to terminate in a matter of months.  She also received a monthly subsidy from the State of Massachusetts to help her pay her rent.

In spite of Ms. Stevenson’s bleak economic circumstances, Judge Joan Feeney ruled that her student loans were not dischargeable in bankruptcy. Judge Feeney concluded that Ms. Stevenson should continue paying her loans through the federal government’s Income Contingency Repayment Plan (ICRP), whereby she would pay a percentage of her income toward paying down her loans for a period of 25 years.  At the end of the 25 year period, any remaining balance would be forgiven.  

Did Judge Feeney Make Ms. Stevenson an Indentured Servant?

When she came into bankruptcy court, Ms. Stevens had unpaid student loans stretching back to 1983. Instead of discharging her debt based on undue hardship, Judge Feeney concluded that Ms. Stevenson should participate in a federal repayment program that would obligate her to pay a percentage of her income toward her debt for 25 years.

If Ms. Stevenson goes on the ICRP, she will be nearly 80 years old when her payment obligations cease.  By that time she will have been burdened with student-loan debt for well over half a century.

Solutions?

It seems to me that the Income Contingent Repayment Plan, which Judge Feeney endorsed for Janice Stevenson, is nothing more than a modern version of indentured servitude, whereby student-loan debtors like Ms. Stevenson pay a portion of her income to student-loan creditors for the balance of her working lives.

The federal student loan program is out of control, and the Income Contingency Repayment Plan is making life harder for overburdened student-loan debtors, not easier.

Congress needs to do two things. First, it should amend the bankruptcy laws to allow insolvent student-loan debtors to discharge their debts in bankruptcy just like any other overburdened debtor.

Second, Congress should pass legislation abolishing the ICRP option for stressed out student-loan debtors. People who are insolvent deserve the fresh start that bankruptcy is designed to give them. They don’t deserve to be saddled with a 25-year repayment plan that will cripple them financially for the rest of their working lives.

References

In re Stevenson, 463 B.R. 586 (Bkrtcy. D. Mass. 2011).