Monday, October 18

The Rolling Student Loan Bailout

From the Wall Street Journal at The Rolling Student Loan Bailout: A consumer guide to all the ways you can avoid repaying Uncle Sam.

The Consumer Financial Protection Bureau performed a genuine public service this week by alerting taxpayers to the tidal wave of student loan defaults coming their way. Too bad the intention was also to alert student borrowers to ways they can avoid repaying those loans.

A new analysis by the bureau shows federal-backed student loan debt surpassing $1 trillion, which is nearly double what it was at the start of the Obama Presidency. As college costs have continued to balloon in tandem with federal loan and grant subsidies, students have assumed more debt. Many jobless Americans have also sought asylum from the Obama economy by returning to school.

A lot of these student borrowers upon entering the real world find themselves unable to make payments on their gargantuan loans, notwithstanding low interest rates. The bureau reports that nearly seven million borrowers or 13% of outstanding loans are in default, defined as not making a required payment for 270 days (nine months).

That headline default rate doesn’t include the 8.9 million borrowers who have postponed or temporarily reduced their payments. The Department of Education allows borrowers to defer payments for up to three years if they’re experiencing economic hardship or can’t find full-time work.

All told, about 40% of out-of-school borrowers have defaulted or delayed their payments, which is a de facto default. The government’s reported default rate will likely climb when borrowers whose temporary amnesty expires have to resume payments on their loans, which in the meantime are accruing interest.

But deadbeats need not fear. According to the bureau, “there are ways to avoid default on a federal student loan even when you think you can’t afford your payment.”

For instance, income-based repayment plans allow borrowers who meet the Department of Education’s criteria for a “partial financial hardship” to cap their monthly loan payments at 15% of their discretionary income (which is defined as income above 150% of the poverty line). They can also have their entire remaining loan balance forgiven in 25 years regardless of how much they still owe.

Courtesy of the Obama re-election campaign, new graduates can cap their payments at a mere 10% of income with any outstanding loans forgiven after 20 years. Congress in 2010 lowered the cap for students taking out loans after July 1, 2014, but President Obama later used his legislative, er, executive authority to make this option available to students graduating in 2012. That’s a nice graduation gift that doubled as a political bribe.

Graduates entering “public service” (i.e., government or 501(c)(3) nonprofit employment) get an even sweeter deal since they can discharge their loans entirely after a mere 10 years of making regular payments. That’s right. Take out a big loan, work 10 years for the government repaying as little as possible, and then have your debt entirely forgiven. Maybe this incentive falls under some previously unknown “Making Government Work Pay” program.

As a side note, borrowers who enroll in income-based repayment plans owe on average three times more than those who opt for the standard 10-year amortization schedule. They thus present the greatest risk to taxpayers who will ultimately bear the cost of the discharged loans.

The consumer bureau laments that only 1.6 million borrowers of federal direct loans have signed up for one of these plans, notwithstanding the Obama Administration’s aggressive advertising. The White House goal is to goose consumer spending and the real-estate market by helping low-income borrowers with huge student loans deleverage on the backs of taxpayers.

The problem is that these income-based repayment plans merely encourage student-loan borrowers to disregard the cost of their education, thus relieving pressure on colleges to make tuition more affordable. They also provide incentives to take nonprofit and government jobs rather than pursue more productive and often better paying work in the private economy. Then again, maybe these consequences were not completely unintended.