This from the New York Times, “Jobs Plan Stalled, Obama to Try New Economic Drive”
And Wednesday in Denver, the official said, Mr. Obama will announce policy changes to ease college graduates’ repayment of federal loans, seeking to alleviate the financial concerns of students considering college at a time when states are raising tuition.
As I was writing the other day, Congress gave the Secretary of Education the power, long ago, to change the terms of loans repaid under Income Contingent Repayment and the newer Income Based Repayment. Right now, these loans go 25 years for ordinary payments, and 10 years if you are lucky enough to have a job in the public sector or with a 501(c)(3) (non-profit) corporation. Up front, though, you can get 3 years of unemployment deferment, and 3 years of hardship deferment. So that is six years where the loan note should not be an issue.
Whenever I hear from a youngster with student debt worries, I mention about the Income Based Repayment (IBR). You need to have your federally-backed loans put with the Department of Eduction in order to do this. (That is, make them into Direct Consolidation Loans). Nowadays, I know that people are also stuck with “private loans” which are impossible to get into the government plan, and difficult to get around in any event. But the IBR is a positive on any federal student loan.
If the Administration wanted to be aggressive, they would opt for a 15-year maximum repayment, and maybe 7% of disposable income. Believe it or not, the colleges have fought these kinds of payment easings, because they are afraid Congress would shut off the whole lending system that keeps them in clover. The more that “loans” turn into inevitable “grants”, like it had been up until about 1974, the less likely it will be that the flow of money to the schools continues at the rate it has. This is bad news for schools without strong endowments, but should be water off the duck’s ass for schools like Harvard, Princeton, Yale, University of Texas, Stanford and even Penn–which each have multi-billions.
(You see how this would be? If the aid is a loan, the government does not have to show the whole dollar as an expense–since it can assume it will be paid back. But, if the aid is a dollar grant, then it is 1-for-1 on the budget. Yes, of course, unpaid loan balances cancel when former students die. But if the current lot of $1 trillion in debt never gets paid, that cost doesn’t show up until the mid 21st century, like 2039 or so . . . )
In the ideal, the multi-billion endowment schools should be surtaxed to pay for grant money to be used at lower endowment schools. But maybe I am more progressive than the progressives. Right now, it would be good to see just some plain debt relief.
[Update #1: If we got what I think is reasonable, above, which is the 7% of disposable income, and 15-year forgiveness, what would that look like?
Well, you know, for single people, the government starts you at 150% of poverty level. My back of the lunch bag on that is $16,000. At that amount, you pay zero.
So say, instead, you are making $36,000. Only $20,000 would count toward the student loan. If the payback percent was 7%, it would mean that your yearly paymnt would be $1,400, or $116.67 a month. If your salary never went up, that would be paying $21,000 back over the 15 years, with whatever balance, cancelled.
To me, that’s fair. These schools were sold, basically, through a fraud: You were going to get this degree and, if you applied yourself, all these job offers and prosperity would come. Every indication except that outright statement was made. And it even came from people of the prior generations who weren’t given the college chance.
But now we see that all that loan money was just a way to make the people connected to the colleges richer, or give them a paycheck. It’s not that we necessarily begrudge them–they showed up for work. It’s simply that the whole program, and its funding, was totally whacked.
It’s high time, then, that somebody in Washington notice that the loan system of higher education finance is totally a mess.
I appreciate that they are doing this with mortgages. They rightly also include the student debt matter in with it.]
[Update #2 10/26/11: It looks like the plan is going to be 10% of disposable income, and 20 year repayment term. The White House is being coy whether this will be made available to all borrowers, or just ones currently in school . . . ]