Escape Student Loan Debt — Slowly

by Philip Brewer on 26 October 2011 18 comments

If you've got student loan debts that you'll never be able to pay off, you've now got a better chance to escape. It's still going to take a while. (See also: Wage Slave, Debt Slave)

Under new rules that Obama announced today, students who can't afford to pay off their student loans will be able to cap their payments at 10% of their discretionary income. If they make those payments for 20 years, any remaining debt owed will be written off.

This is a modest improvement to an already existing program that our own Xin Liu wrote about back in 2009. The older version only wrote the remaining debt off after 25 years, and it required payments of 15% of discretionary income.

For people with low incomes — or people with moderate incomes, but a lot of student loan debt — this will be a huge change. One of the examples in the White House fact sheet is of a nurse earning $45,000 with $60,000 in federal student loans:

Under the standard repayment plan, this borrower’s monthly repayment amount is $690. The currently available IBR plan would reduce this borrower’s payment by $332 to $358. President Obama’s improved ‘Pay As You Earn’ plan will reduce her payment by an additional $119 to a more manageable $239 — a total reduction of $451 a month.

This isn't a new idea. At least as far back as 1980, there was serious talk of letting students pay for their whole education on these terms: They'd sign a note promising the college or university 10% of their income for 20 years, and in exchange the school would provide their education. (I remember reading later that there had been some experiments along those lines, but that they'd been pretty unsuccessful because people who expected to earn a high income — doctors, lawyers, business majors — never signed up. It was only people getting degrees in social work, elementary education, theology, and such who went with the plan — and 10% of their income for 20 years didn't come close to covering the cost of their education.)

I've complained before about how debt traps people in the money economy. On a temporary basis, most people can cut their expenses almost to zero — except that they can't, if they have debts. Paying your debts requires fixed-dollar payments.

That's the big win of this program — the amount people need to pay isn't fixed in dollars; it's fixed in terms of income. If your income is very low, the amount you need to pay back will be very low as well.

There are a few other changes. In particular, it'll become easier to consolidate student loans (and the consolidated loans will get a small interest rate reduction.

Perhaps more important in the long run, the new Consumer Financial Protection Bureau is teaming up with the Department of Education to offer a "Know Before You Owe" financial aid shopping sheet.

I've always been unhappy about the way parents, teachers, guidance counselors, and college admissions officers lead kids (juniors in high school, often only 17 or even 16 years old) to commit themselves to pay back tens of thousands dollars in debt. It makes me unhappy even though the adults have the best intentions, and even though a good education is very important. Yes, other decisions made at that age (such as the decision to have a child) inevitably have life-long consequences — but you don't see students' adult advisors encouraging them to follow that path. I think the decision to take on tens of thousands of dollars in debt is a decision of the same magnitude, and yet many students blithely sign up for it, with little consideration of the consequences or the alternatives.

You're better off avoiding excessive debt in the first place — and maybe the new sheet from the CFPB and the DoE will help. But if that choice has already been made, and student loan debt is a burden, here's a way to reduce that burden significantly.

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Super Saver

What, nothing in the article about the financial stupidity of this program? :-)

Philip Brewer's picture

What's stupid about it? All these loans are already federally guaranteed, so the Treasury is on the hook for the money anyway. I expect that 10% of their income for 20 years is as much money as is likely to be recoverable anyway, so I don't see the government losing—not much, anyway. At the same time, the borrower is given payments that are actually affordable, giving them a chance to get on with their life.

It seems like win-win to me.

Guest's picture
Rebecca B. A. R.

I'm glad for this program. My husband's family is not financially smart at all, and only helped him with $100 for his entire college education/living expenses. The other part of this, is they counted him as a dependent for his first 2 years of college, and he would have been eligible for grants or loans that didn't accrue interest when he was in school (b/c of their income), but they would file for an extention on their taxes, so he never got any grants and all his loans accrued interest while he was in school, too. So, thanks to them, who should have know better, he was deep in debt when he graduated---to a government job that made $10,000 less a year than he had in loans. How can an 18-21 year old be expected to make good decisions about these issues, when his/her parents can't? If someone wants to talk about the financial stupidity of a program, lets talk about the deregulation of the financial systems, or the "trickle down" economics with lowering taxes of the rich, or maybe bailing out the banking system with no rules connected to it.

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Molly

"I've always been unhappy about the way parents, teachers, guidance counselors, and college admissions officers lead kids (juniors in high school, often only 17 or even 16 years old) to commit themselves to pay back tens of thousands dollars in debt."

I agree with this statement wholeheartedly. I remember being a high school senior and choosing my university. "Oh, just take out a couple loans! You'll be fine!" was the message from nearly every front. I fully admit I had never been educated in anything financial back then. (My parents were a mess. Wonderful people, horrible money role models.) Even though I had a great scholarship for an excellent school, I still came out with almost 40K in loans. (I even worked two or three jobs at a time while studying.)

I feel so suffocated by my undergraduate loans on a nearly daily basis. I've been them for a few years, have never been late on a payment, but it's still a very high percentage of my paycheck every month. (I send about 40% of my paycheck towards my bills.) I also have a very low paying job in early education right now. Never in my life have I been irresponsible with money, (Heck! I read wisebread!) but student loans are a killer.

Guest's picture
Jerry

Why not convert all federally insured student loans that resulted in a degree to a zero interest loan? If a person wants a degree, let him or her make a long term commitment that they can uphold.

Seems to me that independent financial counseling prior to obtaining a load should be a prerequisite. Universities are about making money, not educating students.

Guest's picture
Chris

Wow, we are really a socialist country! All that debt being transferred to those who pay their own way and their tax bills. Plus one more boost to the inflation of education prices. I suppose we'll only learn when it's way too late.

Guest's picture
Guest

Right on Chris. What people need to recognize is that when the "government" pays; they really mean you and I pay!

Guest's picture
Guest

Yes and the people who owe on the loans work and pay taxes too. I'm so sick of hearing people say that they pay for all the government help that others get when many times those getting the help also work and pay into those funds. I get that all the time when people find out my kids have Medicaid...people say "oh so I and everyone else pays for your kids medical care." I work...and I have 2 pretty good jobs aside from the fact that my employers don't offer insurance...so I pay for not only my kids medicaid but everyone else's. I'm drowning in student loans I took out to better myself so I could "make it on my own" but those same loans are making it so I can't "make it on my own." Sallie Mae wants me to pay $639 a month...that's almost half my income...and only one of my loans. So you tell me the solution so people can pay off their loans and still make ends meet so they don't need government help...which people like you will then bitch about! People like you are always saying "go get a job and pay your own way." Well guess what? I have 2 jobs so now what kind of ignorant thing can you come up with for why I don't deserve a break? Lots of people work their asses off and still can't seem to make ends meet...so stop with all the illogical fallacies that those who have a hard time making it and need a little help are just lazy or lack motivation...and are looking for a handout. I'm not looking for a handout or for them to wipe my debt clean...just a reasonable payment plan I can afford. I'm willing to pay but I think it's ridiculous for loan companies to expect people to pay such high payments that they can't even make rent and other bills if they do. It's pretty simple...if you want people to pay...make the terms reasonable enough so they can. I'm not gonna go homeless or hungry to pay a loan that covered an education that was suppose to better my situation not make it worse. Seems to me that they don't want their money when they would rather go without it than take what I can give...kinda like cutting off their nose to spite their face isn't it? Oh that's right...they don't actually want people to pay cause they'd rather give out high-risk loans with repayment plans that people can't meet so they can get a government bailout...but I guess it's okay for them to get handouts right?

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Bobbyblue

God forbid instead of this socialist crap the government picked their nuts up off the floor and made education loan and medical insurance/loan payments 100% tax deductible until an individual's effective tax rate is 0.00%.

I hate the sentiment in posts like the one above me. People that feel entitled to education making them money. Sorry honey, you make money, not your education. I also hate to break it to you, but you aren't paying crap and we are carrying you on your taxes because if $600 is "really" half of your income each month and you had half a brain during tax season you'd end up in a negative tax bracket, thus you're not paying for your kids medicaid. Why would you have kids before you can afford them too? I refuse to have kids until I have no debt, as in my house is paid for. Where has America's common sense gone.

Guest's picture
Teresa

One issue that hasn't been addressed is that for some people a lot of this debt is interest - students aren't getting a free ride on these loans, they are more getting a break on the interest. When I was taking out loans in the 90s interest was around 8% and even consolidation hasn't helped that number. I have been paying dutifully for 10+ years and getting nowhere because all I am paying is interest. I am sure I am not the only one.

Also, as Molly stated, when I was in school the big issue was to stay in at all costs - EVERYONE, including my parents, teachers, etc. advised against leaving. All advised me to take on more debt because I could "just pay it back." Should I have known better? Probably. And I would have if I had been 40 when I went to school. The entire system was geared toward making loans as easy and accessible as possible with the implicit promise a good job would help me pay them back.

So sorry conservative wingnuts, its not all as black and white as you'd like to make it seem...

Guest's picture
Guest

I took out a loan of $2,500 in 1981 for college. I came from a poor family but got good grades. Due to circumstances, I never got a degree. In the past 30 years, I have paid over $20,000 on this loan. Due to some periods of dire illness and unemployment and being a single mother of 2 children whose father walked out of the picture, there were periods where I could just not make the pyaments. But the interest still racked up. I had it down to $3,000 two years ago when our company went to a 4 day work week. Within two years, the interest racked up and it is now over $6,000. Payments have been deferred but they do not defer interest. they are making a fortune off the backs of people who can ill afford it. I do not even have health insurane at the age of 48 as I can not afford it on what I make. This country should be ashamed of itself. Kate Olsen, Jeffersonville, NY

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Guest

No, Teresa, you're not the only one. Moreoever, some people who went into fields that promised salaries that would permit loans to be repaid reasonably easily have found that not to be the case.

Again, why are corporate bail-outs fine, but it's a different story for individuals who worked hard, and didn't act recklessly?

Guest's picture
Guest

People need to take responsibility for their actions. I racked up 60k in student loans and have high payments every month. When I had a hard time making the payments I got a second job waitressing to help cover the costs. I took out the loans, I'm responsible for paying them back. 6 years later I'm almost halfway though paying back my loans. Once I started seeing the progress I was making I was even more motivated to pay them back and found new ways to cut expenses to do so. If we make this stuff income based it will encourage people to be lazy. Why go get a second job and take responsibility or budget better when one could sit at home make small payments and wait for the government to forgive my debt. Sadly there are a lot of people that will take the hand-out when they could step it up if they just tried.

Guest's picture
Guest

The President keeps trying to put band aids on programs that need to be completely rebuilt. Must be an election coming up. Need to not allow educational cost to continue to rise more than the rate of inflation. The 6.8% interest rate was great when the prime was above 10%. Today the 6.8% is well above the current prime. Reducing the interest rate would allow most students to afford to pay the complete loan.

The government says the country needs more college graduates, yet seems to do as little as possible to encourage people to make the financial commitment necessary.

Guest's picture
kyrie

What about private student loans like Sallie Mae?

Guest's picture

I think one problem is that parents and students subscribe to the notion of a "dream school"--and that finding this school (no matter what the cost) will lead to an increase in happiness. Private colleges are also complicitous.

i've had many students say that they assumed that the banks wouldn't offer the loans if the banks didn't think the student could pay it back. Since many students don't have any concept of debt/interest, they are stunned by the terms of repayment.

And of course tuition rose to meet the greater availability of loans.

I really believe that students are akin to the people who signed on for those scary mortgages: all are influenced by the "experts" who end up benefiting financially from the indebtedness.

Guest's picture
richard

It's a start in the right direction, but I think we still need to do more to encourage education. The problem is that there aren't enough performance based programs to encourage excellence in our students up front. Our bigger problem is that our tuition is too high on the front end with little performance incentives to reduce that debt. So, when our potential innovators look at the price, they begin to think their time is more worthwhile spent dropping out of school and starting to do something to earn money. Frankly, I think this system encourages a growing uneducated middle class. If we had more tuition grants and scholarships based on the student's performance, then maybe more of our students with the greatest potential would be encouraged to complete their education.

Guest's picture
Guest

Here is a small fact they don't tell you...

After 20 years what is forgive is reported to the IRS as INCOME. You are then charged for the income tax on it.

I got conned into the bullshit that is college. I didn't get anything out of it that I could not have gotten from reading a library book. If I had it to do all over again, I never would have gone.