Friday, June 22, 2007

Is "Fair Payment Assurance" Really Fair?

Let's look at the numbers.
Fair Payment Assurance (text of S.359) means that you can have the option of reducing your loan payments to no more than 15% of your "discretionary income"--meaning, your income over 150% of the poverty line for your family size.
So if you make $15,315 or less--no "discretionary income," $0 loan payments.
Let's say you make $20,000 a year and have $30,000 in loans. Currently you'd pay $345 a month under standard repayment, $208 under extended repayment. That's a big bite out of a monthly take-home of about $1400.
Under Fair Payments you'd pay just 15% of ($20K-$15,315), or $58.50 a month.
Or let's take a single mom with two kids who earns $40,000 a year and has $40,000 in loans. Her standard payment would be $460. Her "fair payment" would be $178.
Under these scenarios, "fair payments" are fair from one point of view but not from another. They are low enough to be manageable even on low incomes, but they don't even cover the interest. This means that if you opt for fair payments, either you better hope your income goes up dramatically so you can get back into standard repayment, or you better be prepared to make these small token payments for 25 years until your debt is finally erased.

To my mind, one looming issue with fair payments is the effect on credit ratings. High student loan balances can affect credit scores, although not as much as messed-up payment histories will. If people go into fair payment plans, their loan balances will actually grow year after year , until they are erased, because the payments don't cover the interest. What kind of effect will this have over a lifetime?
A second issue is, as raised in the comments, who's going to pay for this? Let's take the first example: a person who borrowed $30,000; under today's interest rates and standard repayment they would pay back $41,428.
Under "fair payments," if their income did not go up, they would pay back $702 a year for 25 years, or a total of $17,550. Who's going to pay the rest of the loan balance and the accumulated interest? Is the government going to supplement the payments each month to the lender and avoid having interest accrue?
Personally, I'm on the record in favor of having the federal government heavily subsidize college costs, but I want to make sure that we know what we're getting into and that the subsidies are available to those who need them most. One of the problems with subsidizing college costs through Fair Payments is that it requires someone to take on the debt and the risk up front.

14 comments:

X-er said...

It is completely wrong for the government to subsidize college costs.

I personally do not want money taken out of my paycheck to create a generation of art history majors. And I seriously doubt that you want to pay for that as well.

If you are going to college only to get a job that does not stand to earn enough money to pay off the loan then you are wasting your time and your money.

Who do you think the government is? It is you, your friends and all those people who can't pay back their student loans. By all means let's increase everyone’s tax burden so we have less take home pay.

How would the government determine what sort of careers to subsidize? That is called central planning, to see how well that work go look at some old video footage of what life in the Soviet Union was like.

And get your hand out of my pocket!

Anonymous said...

I'm leaving this comment based on this statement you wrote. "Personally, I'm on the record in favor of having the federal government heavily subsidize college costs, but I want to make sure that we know what we're getting into and that the subsidies are available to those who need them most."

I do not believe that this should be up to the federal government. It is already too big and inefficient.

I would propose to you the idea of the Federal Govt. getting completely out of anything financial with respect to education entirely and instead have them as an oversight type of committee for each State. Then each state would be required to subsidize these costs via the local tax base and votes. I'm sure that you are aware that the Federal Govt. is already only marginally funding education while the lion’s share of this money comes from each state. It's funny that every time the Feds increase the amount of federal dollars to education we get stupider as a society. I believe that this stems from a deeper issue we have in this country of entitlement.

So, if each state were required to handle this via the voting public to pass on tax increases to fund education you would see some very, very good things come about in a matter of just a few years.

Your writing is exceptional but I think that statements such as the one you made above just show a bit of naivety. Hopefully you will read this and other constructive comments with an open mind and increase your readership base and influence with well thought out and palatable ideas and concepts.

Best of luck!

Adam said...

I'm glad x-er said it first!
There is something fundamentally wrong with a person racking up $40,000 in debt to get a job that pays them so little that they can't repay their loan.
I have two friends. One is a lawyer who graduated with $120,000 in student debt. One is a senior soon to graduate with a degree in - get this - social work. He can expect to earn under $30,000 when he graduates with $40,000 in debt. There is no way that he will have the disposable income to repay this loan, but he made the choice to major in a joke of a career for someone underwriting their education with loans… and hoping to remain solvent.
Perhaps having a useless degree while being saddled with massive debt will be the best education the liberal arts majors will get! Developing some common sense and forethought after graduating will serve them well when they contemplate destroying their lives over a bankruptcy hearing or purchasing a house or car they can’t afford.

Anonymous said...

This is welcome reform. MOST OTHER COUNTRIES already offer some version of this, including Canada and Europe. To the person who said social workers are a joke of a job, let's get rid of them and see how society fares when stuff starts falling apart. This will encourage many people to go to school and to be productive members since the risk in case something negative happens is next to nihl. The problem with education is the outcome is variable, but society gains the rewards IF the person comes out a net positive. With this legislation, it will finally be balanced. People shouldn't have debt following them around for their ENTIRE lives if they make a mistake.

Anonymous said...

If the government wants to make college affordable, European-style, it should actually address the COST of college. If you are still paying some school $100k for an undergrad degree then who cares what the interest rate on your loan is? The issue is that some school is getting $100k to give you an undergrad degree. Most European schools are public and so the tuition expense is limited to a reasonable fee. But then (speaking of those unjustly enriched) university presidents wouldn't make seven figures (because they would be government employees) . . .

Anonymous said...

Well, I would've continued in school if this plan had been in place 20 years ago. The world would have one more doctor. However, all I can wonder is how many people are going to rack up extravagant bills for college knowing that at most they only pay a certain percentage of their income. I know plenty of people that would've stayed in college for as long as they could. Their payments would be capped under such a plan and once they hit some amount, they might as well borrow all they could. That doesn't make sense to me. It will definitely be abused.

stealthcat said...

Such a subsidy will guarantee one thing for certain: The cost of college tuition will skyrocket. A college education is a "good/service". It is limited by the capacity of a university. Under normal market conditions, the price is determined by demand. By issuing "free money" (essentially what this comes to), the price of the "good" (tuition) would necessarily have to increase due to the increase in demand (more students). More students will be chasing the same educational facilities, which can only grow so quickly...

The only other results are that either:

A)"the government" (taxpayers!) would have to eat the cost of the forgiven debts. (No thank you...the cost of college is a financial investment for individuals to evaluate on a risk/reward basis).

B) Lenders will refuse to lend under forced low-interest rates, resulting in even fewer people being able to get loans.

Have we not realized from the ample evidence of large-scale social manipulation that it pretty much NEVER turns out well in the long haul?

Anonymous said...

I'm all FOR IT!

I graduated in 1987 with several thousand dollars of debt, and my family has suffered from shorter vacations, smaller houses, and no SUV... all because I repaid the debt. We haven't even traveled internationally, yet.

So make the check out, with interest, and I'll be on my way!

iamsulley said...

Join the Army. You'll be able to travel internationally as much as want then. You could have even gotten the GI Bill that would have paid for your college education and you wouldn't have had to worry about a loan. Serve your country and then it'll serve you back.

Anonymous said...

For some strange reason, people can't seem to grasp the concept that education is a mixture of a public/private good and should be treated as such.

Education enables our society to be more productive. Education increases the living standards for everyone within a society. Education enables more tax revenues to be generated as people will be more productive, more businesses will be started, etc.
Companies won't relocate to a country without an educated workforce. New companies won't be able to be formed without an educated workforce, at least ones that are involved in high value added operations i.e. techology

People are mistaken when they are saying education should be treated solely like a private investment i.e. a stock purchase for personal profit. There are far reaching benefits to every member of society with a well educated society, benefits that will reap far more in rewards than they will cost. There should be more public investement in education..that will make sure we are all more productive for generations to come

Anonymous said...

For some strange reason, people can't seem to grasp the concept that education is a mixture of a public/private good and should be treated as such.

Education enables our society to be more productive. Education increases the living standards for everyone within a society. Education enables more tax revenues to be generated as people will be more productive, more businesses will be started, etc.
Companies won't relocate to a country without an educated workforce. New companies won't be able to be formed without an educated workforce, at least ones that are involved in high value added operations i.e. techology

People are mistaken when they are saying education should be treated solely like a private investment i.e. a stock purchase for personal profit. There are far reaching benefits to every member of society with a well educated society, benefits that will reap far more in rewards than they will cost. There should be more public investement in education..that will make sure we are all more productive for generations to come

Anonymous said...

People are also mistaken when they think this will cause people to incur more debt on purpose. Sure, there will be some abuses, but I think that will be the exception rather than the norm. If you run the numbers, if someone takes out 50,000 worth of loans and makes 30,000 a year, their payments will total 45,000 over the life of the loan.

People think this program will allow people to get away without paying a significant amopunt..that will be the case if people's incomes are ultra low..but I would hope that that would not be the case for the majority of people because increased education=higher earnings and as earnings increase...15% of income becomes MORE than what would be required to repay the loan..so people would elect not to use fair payment assurance.

The system is out of wack. Student loans have trapped numerous people into a debtors prison which I thought this country didn't have. I don't feel bad for people who flagrantly disregared loans, but there are people that have fallen into hard times through illnesses that have gotten better, but will never be able to repay loans and can't have these things discharged..student loans are the only debt that can can grow in perpetuity and never be discharged..

And putting it this way, we are already paying for the defaulters via higher interest rates and other costs. May as well get SOMETHING from them and keep them in a plan that doesn't make them feel hopeless.



I would hope that as people increase the number of years of education, their productivity will increase and fair payment assurance won;t be a problem because if you a

MEG said...

Thank you Stealthcat! He/she is absolutely right. Government subsidies will cause the cost of college education to skyrocket even more.

Tuition prices started to soar when the government got involved in the first place and started promising grants to those who couldn't afford tuition. Each college wants to secure as much of that federal money as possible. The easiest way? Increase tuition!

They'll get paid either way--by struggling parents or by the governement and other lenders. Why shouldn't they raise prices?

This will create an endless cycle of borrowing and piles of student loan debt for most graduates.

If the government largely quits giving grants and subsidizing loans, people will be more discriminate about where they choose to go to school (i.e. they'll pick cheaper colleges). Demand will control the market prices of education, just as it should.

Anonymous said...

Costs have gone out of control
Unfortunately I think the only way to curb costs are price controls on education. I am a free-market person, but costs for education have gotten way out of hand..There should be price controls set, at least on public universities..maybe at the most they could raise it the amount of inflation..and no more..no more double digit increases per year..The public university I went to costs more than 12,000 a year now for IN STATE tuition. I don't think I could have afforded to go there if I had to go now. It is getting insane..kids are graduating with unmanageable amounts of debt. Something needs to be done