Showing posts with label income-driven repayment plans. Show all posts
Showing posts with label income-driven repayment plans. Show all posts

Friday, December 4, 2020

Steve Rhode: Here is Why Forgiving Student Loans is an Impossible Issue with an Easy Solution

Written by Steve Rhode

 Originally published at Get Out of Debt Guy

When it comes to a rapidly accelerating financial burden on American families, there is no greater concern than student loans.

The debt is burdensome and unfair on many levels that I’ll explore below.

However, there is a straightforward and simple solution for dealing with all of this outside of struggling to develop a fair forgiveness strategy. I’ll talk about that after we look at common opinions on the subject.

Is Student Loan Forgiveness Fair?

The talk of forgiveness is a difficult topic because how do you reach any level of fairness.

And let me be clear when people talk about forgiving student loans, it only applies to federal student loans. Not private student loans.

As Howard Dvorkin, Chairman of Debt.com said, “Only one-third of the people in this country get a four-year college education. The two-thirds without a college education is expected to subsidize their education when it is very likely that they earn less than the people who are receiving the educational subsidy.”

Dvorkin went on to say, “The issue of forgiving debt is complicated. What about all the people that have already struggled to pay their debts, and now other people get loans forgiven. That’s not fair.”

Student Loans – Another Financial Mistake for Many

A 2019 student by New York Life of 2,200 adults found the average participant reported taking 18.5 years to pay off their student loans, starting at age 26 and ending at 45.

That is a significant portion of life to have to be tied to a student loan payment that should have been directed to saving for retirement and then mushroomed into a giant nest egg. It can take decades to recover from that financial mistake. But that’s not the only financial regret people have.

What is shocking is the number of people that have student loan debt but who never graduated. I’ve seen statics as high as 75 percent of people with any student loans never obtained the degree.

And the wave of for-profit schools that have oversold education to people that never should have purchased their product is another national disaster.

“For-profit schools are not worth the money,” said Dvorkin. “As an employer, I hire people with traditional non-profit college degrees before I would hire someone with a for-profit degree.”

The Federal Reserve Bank of New York said, “Students who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools.”

The study went on to say, “Overall, our results indicate that, on average, for-profit enrollment leads to worse student loan outcomes for students than enrolling in a public college or university, which is driven by higher loan takeup and worse labor market outcomes. This is an important set of findings for several reasons. First, a substantial amount of public funds go to for-profit institutions through the financial aid system. Our estimates indicate the return to such expenditures may be quite low. Second, the results suggest that students who attend local for-profit institutions when there is a negative labor demand shock may be making mistakes: they would be better off attending the local public college or university instead.”

But even non-profit schools are ramping up tuition and selling students into seats that maybe should not have been admitted.

Student loan debt is a life sentence in painful debt for many: The Impossibility of Forgiveness

Opinions on forgiveness range all over the place. Betsy DeVos, the current Secretary of Education said recently, “Policies should never entice students into greater debt. Nor should they put taxpayer dollars at greater risk. There are too many politicians today who support policy that does both.”

 

She also labeled student loan forgiveness as an “insidious notion of government gift giving. We’ve heard shrill calls to “cancel,” to “forgive,” to “make it all free.” Any innocuous label out there can’t obfuscate what it really is: wrong.”

Forgiveness is never going to be fair, and it’s not going to a quick and effective way to stimulate the economy in a difficult time from a pandemic, as some claim.

Today, student loan forgiveness would result in people not making loans they are already in default on or making payments that are too low to pay the debt off. At most, it will result in people not having to make some loan payments monthly.

The economic impact will be felt over a long period of time rather than the boost and support the economy needs now.

While DeVos talks about avoiding policies that entice students into greater debt, her own Department of Education is a big part of the problem, with help from Congress.

As the federal student loan program stands now, there is $1.37 trillion of outstanding debt to students, and the Education Department has determined that borrowers will only pay back $935 billion. That leaves the program in the red and holding for $435 billion of bad loans.

The Wall Street Journal said, “The analysis was based on government accounting standards and didn’t include roughly $150 billion in loans originated by private lenders and backed by the government.”

 

To deal with that shortage, “Congress will have to raise taxes, cut services or increase the deficit to cover the losses.” That solution is also not fair to the many that repaid their loans.

So the Battles and Arguments About Student Loan Forgiveness Are Complicated

We can argue and politically position ourselves around the idea of forgiving student loans is either the best thing or the worst thing ever to happen.

It is actually a moot point since the program is in so much trouble already.

Let’s not forget the 42 million student loan borrowers will become due again in January 2020, as a result of the CARES Act forbearance ending.

People that can’t afford their student loans will suddenly be required to begin payments again. Defaults will explode even more.

As it stands now, the Department of Education’s base position is students should feel lucky they can enroll student loan debt in an Income-Driven Repayment program (IDR) that will give them a loan payment based on income. But, as I wrote before, it’s a trap.

As it stands now, while a student loan debtor might enroll in an income-based repayment program, the minimum payment is not enough to cover the interest being charged on the loan, and the balance owed grows. While people say, “certainly Congress will change that.” The reality is they have not, over the many years the programs have been in place.

So the way the “lowest payment” solution works right now is that the government lets you pay less than is due, that grows the balance, and in two decades, when the exploded balance is forgiven, people will owe income tax on that debt unless they are insolvent. It sounds crazy, but it is true.

Here is a case that is a great example of the madness. The student loan debtor could not afford to pay off her $40,000 of student loans over 14 years but is now required to enroll and remain in an IDR that will drive her balance up.

The article by Richard Fossey J.D. says, “How could the judge conclude that Hladly might someday pay off her student loans when the amount she initially borrowed had tripled since the time she graduated from law school? If Hlady could not pay off $40,000 in student loans over 14 years, how will she ever pay $140,000 over the next 25 years, especially since her loan balance grows by $20 a day in accruing interest?

As Judge Scarcella observed, Ms. Hlady is 48 years old. Her 25-year repayment plan will terminate when she is 73. By that time, her loan balance will be more than a quarter of a million dollars. This amount will be forgiven, but the forgiven debt will be taxed as income unless Hlady is insolvent at the time.”

With IDR Plans, the Government Has Already Accepted the Loan Forgiveness Proposition

In my opinion, with federal student loan forgiveness programs already on the books, policymakers have already accepted some form of loan forgiveness. Yet, the current talk of student loan forgiveness ranges from its “socialism” to its “a right.”

As it stands today, the federal government already runs a student loan program that is rapidly increasing in delinquencies, defaults, and repayment plans that will only grow the balance.

The only current winners in the student loan cycle are the schools that can sell students on attending and get easy money from the federal government.

Students enroll, schools get paid and accept almost no responsibility for the outcome. When a student loan debtor was sold education, they could never logically or mathematically afford and later defaults; the school does not have to pay back the loan.

Howard Dvorkin said, “Colleges must start operating as a business and deliver service within income. The days of college expansion paid for from easy government student loan money needs to stop.”

He’s right.

Student Loan Forgiveness is Much-Ado-About-Nothing and Misdirected

I hate to state the obvious here, but rather than worry about the inequities of forgiveness and who wins and loses, the most rational and logical option is to roll back the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

BAPCPA made private student loans harder to discharge in bankruptcy. And private student loans are growing as well.

The issue is students are drowning in debt. It can be argued that because of student loan debt, they are also having to take out other debt and reduce retirement savings.

When those people are old enough and can no longer work, the lack of retirement savings will create a public safety net drain. No matter how you look at this, the systemic problem of easy money for education has driven up the debt, and we will all pay for it in one way or another.

The Solution Seems So Apparent

Up until 1976, all student loans were dischargeable in bankruptcy. Bankruptcy is a legal right for consumers to get a fresh financial start, and it is even a part of the U.S. Constitution. Those that file for bankruptcy generate an immediate stimulus for the economy and have a second chance to do better, having learned hard lessons from mistakes.

Returning to allowing both federal and private student loans to be discharged in bankruptcy has many features:

1.      It is a current and accepted legal process with clear rules and guidelines.

2.      The debt is forgiven tax-free.

3.      It allows people a chance to get a fresh start from an impossible situation. Oftentimes these issues are the result of accidents, injuries, medical issues, pandemics, etc.

4.      A bankruptcy Trustee and Judge must review and approve the discharge plan. If a consumer has too much income for a full immediate discharge, they will be required to enter a five-year repayment plan in a Chapter 13 bankruptcy.

5.      Forgiveness will be restricted to only those that qualify.

6.      The fact the loans may now be dischargeable should force lenders to make better loan decisions before just handing the money to anybody.

7.      If loans are less abundant or actually just based on repayment ability, then schools would have to ratchet back tuition fees. Less easy money would be available.

8.      This process would be restricted to those who need and meet the accepted legal standards for bankruptcy.

9.      People that can afford to repay their loans will have to do so through their Chapter 13 repayment plan.

10.  We can eliminate this ridiculous game and administration of student loans that will never be repaid and have to be dealt with.

If We Restore Bankruptcy Student Loan Debt Elimination to All Then We Can Focus on Doing Better

There is no argument that education leads to opportunity. I don’t care if that is education at a trade school, some other hands-on education, or a degree in some college subject at the best school in a 200-mile radius.

I heard recently about a “toilet paper” degree program. That’s where plumbers make much more than people to go to college. I do know some very rich electricians and plumbers. I guess that’s a raw subject for me since I’ve spent $3,000 in plumbing bills in the last 30 days.

We have a wonderful system in place to allow people to have affordable access to start their education. The local community college is a fantastic place to start.

It is affordable, and as Dvorkin said, “When thinking of how to get started on the journey of education, community college is a great investment. Think about this: why pay much higher tuition to take classes that use the same books as the community college class uses. Start affordably and then transfer to a more expensive school if you want to continue to finish your college degree.”

The power of community colleges is not new. It is proven. My very own father started his education from a farm in Michigan at the local community college. He then went on to become the very first Ph.D. graduate in Political Science at Michigan State.

So let’s all stop trying to reinvent the wheel here. Just restore the bankruptcy provision for all student loans and require some commonsense and responsibility on future lending.

There will never be any universally accepted plan for past forgiveness of student loans that were flawed from the start.

We are a great country and instead of looking back, let’s do better moving forward.

 

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).

Saturday, July 27, 2019

Fraud in the Federal Student Loan Program? We're shocked! Shocked!

Everyone knows the federal student-loan program is a train wreck. Even Education Secretary Betsy DeVos described it as a looming thunderstorm and admitted that 43 percent of all student loans are "in distress."

Now the Government Accountability Office has issued a report indicating there may be fraud in the income-driven repayment programs. (IDRs)  This is what GAO reported based on an analysis of a sample of IDR plans:

  • About 95,000 people who are enrolled in a sample of IDRs report they have zero income, which means they are excused from making any payments on their student loans. A GAO analysis found that 34 percent of these people had estimated annual wages of $45,000 or more (p. 12).
  • Monthly payments for people in IDRs are partly determined by family size, with payments adjusted downward for borrowers who have dependents. GAO identified 40,00 IDR plans held by borrowers who claimed to have nine people or more in their families (p. 17). More than a thousand IDR participants claimed to have a family size of 16 people or more!
GAO's report undoubtedly understates the extent of the problem. According to GAO, there are 1.1 million people in IDRs who report having zero annual incomes (p. 36, footnote 8), and GAO did not look at all those individuals. If GAO's findings for a sample of IDRs is representative of all the borrowers who claim to have no income, then about 375,000 people who claim to have zero income are lying.

The GAO report is disturbing because more and more student borrowers are entering income-driven repayment plans. According to the College Board, 29 percent of all student debtors in repayment were in IDRs in 2018 and their debt constituted almost half of all the money in repayment.

Even if all the people in IDRs are honestly reporting their income--and GAO found thousands of liars-- almost everyone in an IDR is making income-based payments that are so low that they are not paying down the loan principal.

In short, the Department of Education's income-driven repayment plans are hemorrhaging red ink, but it is unclear just how many billions of dollars are being lost. No wonder Betsy DeVos commissioned a private accounting firm to audit the student-loan program. Apparently, she wants to know the true scope of this disaster.


Fraud in the student loan program? We're shocked! Shocked!





Friday, September 21, 2018

Department of Education's New Report on Student-Loan Casualties: A Dr. Strangelove Moment

You remember that great scene from the movie Dr. Strangelove.  U.S. President Muffley (played by Peter Sellers) worries about the consequences of nuclear war with Russia. "You're talking about mass murder," President Muffley muses.

But General Turgidson (played by George C. Scott) is not concerned. "I'm not saying we wouldn't get our hair mussed. But I do say no more than ten to twenty million killed, tops."

Betsy DeVos is our modern day General Turgidson. The student loan program is shattering the lives of about 20 million Americans.  But in DeVos' mind, that's a small price to pay for a program that enriches her buddies in the for-profit college industry.

And so without further ado, I will summarize the Department of Education's most recent report on the student-loan debacle.

Income-Driven Repayment Plans. As DOE reports, more and more distressed student borrowers are being herded into income-driven repayment plans (IDRPs). As of June, 7.1 million people are enrolled in IDRPs, a 20 percent increase from just a year ago.

Student borrowers in IDRPs are America's new serfs. They pay a percentage of their income for 20 or 25 years to repay the student loans they took on to attend some raggedy-ass college that didn't prepare them for a job.

Of course, IDRP monthly payments are generally low. In fact, IDRP participants who live below the poverty line make monthly payments of zero. But virtually everyone in these plans--7.1 million suckers--will die without ever paying back their loans. In fact, for most of them, their loan balances are going up with each passing month due to unpaid accruing interest.

Borrower Defense to Repayment. According to DOE, 166,000 student borrowers filed so-called "borrower defense" claims. These claimants are seeking loan forgiveness on the grounds they were defrauded by the colleges they attended. Thousands of these claims were filed by people who attended just two for-profit institutions that went bankrupt: Corinthian Colleges and ITT Tech.

As of June 30, two thirds of these claims are still pending, and only 80 percent of the processed claims were approved.  Meanwhile, borrowers who have pending claims are still obligated to make their monthly loan payments.

Delinquency Rates. Delinquency rates are down slightly, DOE assures us, but almost a quarter million borrowers defaulted on their student loans during the third quarter of this year.  That's 2755 people going into default every day.  A high percentage of these defaulters attended for-profit colleges. But apparently those casualties are acceptable to Betsy DeVos.

Public Service Loan Forgiveness Program.

Hundreds of thousands of student debtors have taken jobs in the public sector in belief that their student loans would be forgiven after 10 years under the Public Service Loan Forgiveness Program (PSLF). It now seems they were deluded.

PSLF was enacted by Congress in October 2007, so the first people entitled to PSLF relief became eligible in October 2017. So far, 28,000 people have applied for PSLF relief, but only 300 claims have been approved and only 96 people have actually had their loans forgiven!

If Betsy DeVos and her gang of former for-profit-college hacks continue to refuse to implement PSLF in good faith, hundreds of thousands of college borrowers who relied on PSLF will suffer incalculable hardship.  For example, thousands of people have graduated from third- and fourth-tier law schools with six-figure debt, and they can't find law jobs in the private sector that pay enough to service their student-loan obligations. As Paul Campos pointed out in his book Don't Go to Law School (Unless), PSLF is these people's only viable option for paying off their law-school loans.

Conclusion: The Student Loan Program is in Fine Shape: "10 to 20 Million Casualties, Tops!"

DOE's own data shows us that the federal student loan program is a disaster: high default rates, income-driven repayment plans that don't allow people to pay off their loans,  borrower-defense rules that DOE administers incompetently, and a PSLF program that DOE refuses to implement in good faith. Meanwhile, the for-profit gang is getting rich.

Literally, there are at least 20 million casualties. Betsy DeVos must think 20 million casualties is acceptable, but I do not. Why don't our  politicians--Republicans and Democrats-- begin to behave like grownups and impeach Betsy DeVos, who is running DOE like a character in Dr. Strangelove.

10 to 20 million casualties--tops!

Friday, June 22, 2018

Researchers say Income-Driven Repayment Plans create moral hazard: Yuh think?

More and more student borrowers are being forced into income-driven repayment plans (IDRPs) because they can't pay back their college loans under a standard 10-year repayment schedule. According to an article in Educational Researcher, the proportion of student borrowers in IDRPs increased from 5 percent in 2012 to 20 percent in 2016.

Three researchers affiliated with a North Carolina research institute analyzed data on IDRPs, and their findings are not surprising. They found people entering IDRPs borrowed more than people who did not enter these plans. IDRP participants also had lower-income backgrounds than people who did not sign up for IDRPs.

They also found that IDRPs create a "moral hazard" because monthly loan payments under these plans are not coupled to the amount of money students borrow. "As IDR plans become more generous," the authors wrote, "students have less incentive to limit their borrowing and less incentive to seek high-paying jobs because upon leaving school their monthly loan payments depend only on discretionary income, not loan amounts." And, as students become more willing to borrow, colleges and universities "face lower incentives to curb tuition increases."

Put another way, if borrowers know their loan payments will stay the same regardless of whether they borrow $50,000 or $100,000, then why not borrow $100,000? And from a university's perspective, if students are willing to borrow enormous amounts of money to pursue their studies, then why not jack up tuition rates?

The researchers also pointed out that a lot of IDRP participants are making payments so low that their loan balances are growing due to accrued interest. In other words, their loans are negatively amortizing. Thus at the end of a 20- or 25-year IDRP, many borrowers will owe more than they borrowed.  People who complete IDRPs will see their remaining loan balances forgiven, but the forgiven amount is considered taxable income by the IRS.

Income-driven repayment plans were touted by the Obama administration as a good way for student borrowers to manage growing levels of debt. But the article in Educational Researcher adds to a growing body of evidence pointing to this stark reality: millions of people in IDRPs have student-debt loads they will never pay off.

So why did the U.S. Department of Education expand its income-driven repayment options? After all, even a child could foresee the moral hazard built into these programs.  These plans are being peddled for one reason and one reason only: They help obscure the fact that millions of Americans--probably 20 million--are not paying off their student loans.



References

Lacy, T. Austin, Conzelmann, Johnathan G.,  & Smith, Nicole D. (2018). Federal Income-Driven Repayment Plans and Short-Term Student Loan Outcomes. Educational Researcher, 47, 255-258.


Saturday, December 9, 2017

It's official: The Republicans hate student-loan debtors

A few days ago, Republicans introduced their bill for revising the Higher Education Act. Some provisions in the GOP proposal are astonishing in their cruelty and contempt for student debtors.
  • Abolishing income-drive repayment plans. For starters, the Republicans want to end all student-loan forgiveness. Goodbye PAYE. Goodbye REPAY. Students who can't pay off their loans under the standard 10-year repayment plan will be forced into income-driven repayment plans that continue until their loans are paid off--which for many of them will be never.
  • Abolishing the Public Service Loan Forgiveness Program. The GOP wants to abolish the Public Service Loan Forgiveness Program, which Congress created in 2007. Hundreds of thousands of students have entered into public-service jobs expecting to have their college loans forgiven after 10 years. If the Republican proposal becomes law, some of these people may be grandfathered into the PSLF program, but the program will be shut down.
  • Forbidding states from enforcing consumer protection laws against student loan servicers. Buried on page 464 of the GOP's bill is a provision that forbids states from regulating the student-loan serving companies.  Some state AGs have vigorously pursued wrongdoers in the loan servicing business, and Republicans apparently want to shield the debt collectors from state consumer protection laws.
Where are these pernicious Republican ideas coming from? Representative Virginia Foxx (R-NC) is Chair of the House Education Committee, and she supports all these nasty proposals. But Foxx is not pulling the strings. These toxic proposals are coming from the heart of the Trump administration--and undoubtedly from Secretary of Education Betsy DeVos.

I don't know if these punitive GOP proposals will make it into federal law. But if they do, Republicans will push millions of college borrowers into a lifetime of indebtedness.  It's almost as if the GOP wants to create an underclass of sharecroppers.

President Trump and his fiendish Secretary of Education (who has financial ties to the debt collection business) may think their scheme to punish student borrowers will play to the Republican base. But if these proposals get through Congress, there will be hell to pay in coming elections.  

The Democrats are missing a golden opportunity if they don't take up the banner of student-debt relief.  In my view, they should forget Russia and turn their venom toward Betsy DeVos, who may be Trump's Achillese heel. The Dems need to educate college borrowers about the nation's venal Secretary of Education and rouse them to righteous fury.

Betsy DeVos summer home: Maybe you could get a job there as pool boy


References

Douglas Belkin, Josh Mitchell, & Melissa Korn. House GOP to Propose Sweeping Changes to Higher EducationWall Street Journal, November 29, 2017.

Jillian Berman. House Republicans seek to roll back state laws protecting student loan borrowers. Marketwatch.com, December 7, 2017.

Danielle Douglas-Gabriel. GOP higher ed plan would end student loan forgiveness in repayment program, overhaul federal financial aidWashington Post, December 1, 2017.

Danielle Douglas-Gabriel. Dems raise concern about possible links betwen DeVos and student debt collection agencyWashington Post, January 17, 2017.













Thursday, November 9, 2017

Millions of Older Americans Are Delinquent On Their Loans: Long-Term Repayment Plans Will Make the Problem Worse

Several decades after obtaining their college degrees, millions of older Americans are still paying on their student loans. According to the Consumer Financial Protection Bureau, the percentage of student borrowers over 60 years of age who carry student-loan debt increased by 20 percent from 2012 to 2017.

Even more alarming is the rising number of older student borrowers who are delinquent on their student loans. In all but five states, delinquency rates among older student debtors went up over the last five years.

In California, for example, more than 300,000 people age 60 or older hold $11 billion in student-loan debt, and 15 percent of these borrowers are delinquent.

Delinquency rates for older borrowers vary substantially from state to state. In Georgia, Mississippi, Oklahoma, South Carolina, and West Virginia, one out of five student-borrowers age 60 or older are delinquent on their loan payments.

As the CFPB noted, these data show that an increasing number of older Americans are still shouldering student-loan debt at an age when most of them are living on fixed incomes.  And these data do not reflect the Department of Education’s recent campaign to recruit more and more college borrowers into income-based repayment plans that can stretch out for as long as 20 and even 25 years.

During Obama’s second term in office, the Department of Education rolled out two relatively generous income-driven repayment plans (IDRs): PAYE and REPAYE.  Both plans call for participants to pay 10 percent of their adjusted gross income on their student loans for a period of 20 years.

Most commentators have viewed these initiatives as a humane way to lower struggling borrowers’ monthly payments. But for many of the people in IDRS, probably most of them, the monthly payments don’t cover accruing interest. For these people, their IDRs cause their loan balances to go up even if they make regular monthly payments.  Thus, IDR participants will enter their retirement years with thousands of dollars in unpaid student-loan debt.

The CFPB report should be alarming to everyone. Already, we are seeing student borrowers enter their sixties with increasing levels of debt; and delinquency rates are climbing.

This is a crisis right now, but as the IDR participants reach retirement age, the crisis will grow worse. Indeed, it will be a calamity as millions of people try to service their student loans while surviving on Social Security checks and small pensions.

References

Older consumers and student loan debt vary by state. Consumer Financial Protection Bureau, August 2017.