President Obama’s student loan repayment plan encourages students to take on more debt and lets colleges keep raising tuition, writes Peter Schiff on Business Insider. The taxpayers will get the bill.
The move will come as a great relief to an education establishment increasingly concerned that students might no longer be able to afford skyrocketing tuition rates.
The AP reported today that state support for higher education has fallen 23% after accounting for inflation over the last ten years, even as tuitions have risen 5.6% faster than CPI. This gap has been bridged by a whopping 57% increase in federal student loans over the same time period due to the increased cost of tuition and number of student enrollment.
Under the new version of Pay As You Earn, borrowers would pay 10 percent of “discretionary income,” defined as total income above 150% of the federal poverty level (about $16,000 for an individual). After 20 years, the loan is forgiven.
Assuming that a successful college graduate would earn, on average, $80,000 per year over the course of the 20-year obligation period, the repayment burden under the new plan will total somewhere around $4,500 per year, or $90,000 for the life of the loan. A less successful graduate who earns say $50,000 per year, on average over the 20-year obligation period, would have a repayment burden of just $1,500 per year, or just $30,000 over the life of the loan.
For students anticipating an average income, Pay As You Earn provides an incentive to borrow heavily: If you’re only going to repay $30,000 to $90,000, why not borrow $200,000?
Colleges and universities will have no incentive to control costs, Schiff adds. Why not build that new rock-climbing wall or performing arts center? Students will enjoy it and taxpayers will pay for it.
Students have racked up $1 trillion in debt in an era when they thought they’d have to pay it back, Schiff writes. Imagine how much they’ll borrow now that they won’t have to pay the full amount.
In a way, Obama would be turning higher education in to a third-party payer system (not too dissimilar from our current health care system – which is also characterized by outsized cost increases).
Fewer students will live at home and go to community college to save money, he predicts. Frugality is for suckers.
Income-based repayment (IBR) is a “disaster” that could cost billions of dollars in the future, writes Andrew Gillen. The Congressional Budget Office (CBO) estimates costs and revenues for a 10-year window: Since IBR’s costs kick in 10 to 20 years in the future, it’s being treated as free.
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at 6:46 am
[...] Pay As You Earn plan limiting loan repayment encourages students to borrow more and colleges to charge more, writes a business analyst. Taxpayers will get the [...]
at 3:25 pm
Interesting that teachers, by default, would fall into the category of “less-successful college graduates,” even if they have Masters degrees.
This seems like an economic disaster, and a big incentive to get kids to drag out the life of their loans. Who would want to try to pay a loan in 10 years when all the extra interest (and then some) will be forgiven after 20? It also seems to be a dis-incentive for people to aspire to earn higher salaries… or perhaps a big incentive to try to cheat on their tax documents.
I have a lot of student loan debt and as a teacher, I would very much like to have that amount reduced as much as possible. But I wonder what kind of precedent we’re setting, and what it will mean for the future of higher ed spending and the economy?
at 1:22 am
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