Showing posts with label Mike Meru. Show all posts
Showing posts with label Mike Meru. Show all posts

Sunday, July 15, 2018

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.

Monday, May 28, 2018

Mike Meru racked up $1 million in student loans to go to dental school. Will he ever pay it back?

Perhaps you read Josh Mitchell's story in the Wall Street Journal about Mike Meru, who took out $600,000 in student loans to go to dental school at University of Southern California. Due to fees and accrued interest, Meru now owes $1 million.

How did that work out for Dr. Meru? Not too bad actually. He's now working as a dentist making $225,000 a year. He entered an income-based repayment plan (IBR), which set his monthly payments at only $1,590 a month. If he makes regular payments for 25 years, the unpaid balance on his loans will be forgiven.

But as WSJ's  Josh Mitchell pointed out, Dr. Meru's payments don't cover accruing interest, which means his student-loan debt continues to grow at the rate of almost $4,000 a month. By the time, Dr. Meru completes his 25-year payment obligations, he will owe $2 million. Although this huge sum will be forgiven, the IRS considers forgiven debt as taxable income. Dr. Meru can expect a tax bill for about $700,000.

The student-loan program's many apologists will say Dr. Meru's case is an anomaly because most people borrow far less to get their postsecondary education. In fact, only about 100 people owe $1 million dollars or more. But 2.5 million college borrowers owe at least $100,000; and even people who borrow far less are in deep trouble if they drop out of school before graduating or don't land a good job that allows them to service their loans.

Here are the lessons I draw from Dr. Meru's case:

First, income-based repayment programs are insane because student debtors make payments based on their income, not the amount they owe. Dr. Meru's payments are set at $1,590 a month regardless of whether he borrowed $100,000, $200,000 or $600,000.  Thus, IBRs operate as a perverse incentive for students to borrow as much as they can, because borrowing more money doesn't raise the amount of their monthly payments.

Second, IBRs allow professional schools to raise tuition year after year without restraint because students simply borrow more money to cover the increased cost. USC told Mr. Meru that dental school would cost him about $400,000, but USC increased its tuition at least twice while Meru was in school; and Meru wound up borrowing $600,000 to finish his degree--far more than he had planned for.

Does USC feel bad about putting its graduates into so much debt? Apparently not. Avishai Sadan, USC's dental school dean, said this: "These are choices. We're not coercing. . . You know exactly what you're getting into." By the way, Dr. Sadan got his dentistry degree in Israel: and I'll bet it cost him a lot less than $600,000.

And here's the third lesson I draw from Dr. Meru's story. The student loan program is destroying the integrity of professional education.  As I've explained in recent essays, the federal student loan program has allowed second- and third-tier law schools to jack up tuition rates, causing graduates to leave school with enormous debt and little prospect of landing good jobs.

A medical-school education now costs so much that graduates are forced to choose the most lucrative sectors of the medical field in order to pay off their student loans. That is why more and more general practitioners are foreign born and received their medical training overseas, where people don't have to borrow a bunch of money to get an education.

Dr. Avishai Sadan, Dean of USC's School of Dentistry
"You know exactly what you're getting into."
References

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