Sunday, July 01, 2012

The Student Loan Forgiveness Act

It's been a while since I've written anything, which as a general rule, means I'm up to some pretty cool things. MUCH more detail to come later about that. For now, my softball game has been cancelled due to Oregon rain, so it's a prefect time to sit down and write.

I got into my first mini-Twitter discussion this week about the Student Loan Forgiveness Act. Thanks @eliwaite for the awesome discussion! He supports it. I'm less enthusiastic. One of the downsides of Twitter though, is that it's hard to form comprehensive thoughts. So prepare for some comprehensive thoughts!

What is the Student Loan Forgiveness Act?
Representative Hansen Clarke put together a nice summary which I'm going to borrow from:

  • The plan is called the "10/10 standard": if you make payments equal to 10% of your discretionary income for 10 years, your remaining federal student loan debt would be forgiven. Discretionary is thrown in there to account for the poverty line. I.E. if you make less than 150% of the poverty line given the size of your family, you have no discretionary income.
  • So, if you don't have a job, you're payments would be $0 until you get one. No more compounding fees, no more rising interest rates. No more frantic job searching & crying at night in your parent's home.
  • The bill will also shorten the Public Service Loan Forgiveness requirement to 5 years instead of the current 10. People will also be more willing and able to go into public service because they won't have to make large student loan payments.
  • Current borrowers are eligible for full forgiveness, future borrows will be capped at $45,520 (with no mention of future inflation adjustments)
  • Since the money has to be paid from somewhere, it will be funded by projected savings from Iraq and Afghanistan Overseas Contingency Operations; the bill will NOT affect funding for existing student aid programs.
  • The bill will increase millions of American's purchasing power because their debt will be forgiven. This will free them up to invest, buy homes, and start a business. Or go into public service, remember?
  • The bill will create jobs since consumer demand will be going up due to the lowering of student loan payment.

You can wade through the whole thing if you dare.

Is Student Debt Actually A Problem?
I'm a data person. I like to see facts and figures before I make a decision (a blessing & a curse). So, when I'm told that student debt is reaching ONE TRILLION DOLLARS, I have all sorts of questions:

  • What is the per-person debt? Perhaps we just have more people going to school?
  • How much is undergrad verse grad school? This would need to be split into "just grad" categories too.
  • How much is principal vs interest vs fees? I want to know what's actually crushing people.
  • Of the people "struggling" what are their degrees in? Perhaps the loan isn't the issue. :)
  • Can I see the data grouped by year, school, state, degree, etc?
  • One fun fact: student debt is now larger than credit card debt. Why? If it's because people are being more responsible and paying off their credit cards, shouldn't we be celebrating!? I don't know, and I'm willing to bet nobody really knows.
Depending on these answers, the solution will be very different. Perhaps the real problem is with people who go to a private school which costs $45,000 per year to get a teaching degree. Perhaps those people need to find a different method of paying for school (or better yet, finding a different school).

So is it actually a problem? I honestly don't know. If you have the data, share it with me because at this point it just sounds like a bunch of people whining about a bad choice they made. The bad choice being: going to a school they couldn't afford.

Let's Make It Personal
The average student loan debt is $25,000. Jessi and I happen to have $50,000 left after paying for 5 years (Wow! Time flies!). Jessi and I would be able to participate in this program since we're right there with all these other people. So I'm not just some old curmudgeon complaining. Quite the opposite: we're proactively paying it down fast. I guess we're part of the reason the economy stinks... We recently re-financed our mortgage, and that difference is going to student loans. When I get a raise, that amount goes to student loans. If I get a bonus, or tax refund, that goes to student loans. We're also starting up a business which will help to... wait for it... pay student loans. The bill uses absolute terms like "no choice" and "forced to" a lot, which I'm not a fan of. People do have a choice, they made not like all the options, but they DO have a choice (believe me, I want an iPad, but choose to pay off my student loans).

In retrospect, we should not have gone to Willamette because they charged too much for what we got. Setting aside the whole "found your wife" thing, we would have been much better to have gone to local state schools, live at home and work part of the time. Let's contrast this with a friend who said he started out at an expensive private school. But after the first year did the math and decided his future job as a pastor didn't justify the high expense. He changed to a local state school. He graduated debt free, got to travel, and now has a awesome job doing what he loves. He just had a kid and his wife (woah, he still found an awesome wife!) is able to stay at home with the baby. Jessi and I don't even have children and there's no way we could afford to not let Jessi work. We made a poor decision. We are now making better decisions to take care of our loans.

Where's The Money?
The bill makes it a point to say the financing for this program will come from projected war savings. Great. Except for the fact, and this is what really gets me, the government itself is being crushed by debt. Do we not remember the whole debt-ceiling debate? In personal finances we're taught to spend less than we earn. The same thing applies to the government. Now, I'm not an advocate of a balance budget - that actually compounds any economic fluctuations. Instead, like personal finances, the government should save money when times are good, so it can spend that saved money when the economy goes down, to help level it out. I know, crazy concept - the same crazy concept each of us should be doing in our personal lives with emergency funds.

So, it's not so much I hate this bill. In a bit I'll suggest some tweaks. I hate the idea of the government spending money it doesn't have. All it's doing here is shifting funds, again, funds it DOESN'T ACTUALLY HAVE. Until the government learns to control it's spending, I don't like any new program. I guess that means I won't like any new program for a while... This program might be good. I know buying myself a new iPad would be good, but I, and the government have more important obligations to take care of first.

No, But It Really Does Stink
I get it. It's a catch 22. The economy stinks because people paid too much for college. We could (and should!) figure out ways to reduce the cost of education. My current favorite is Kahn Academy. But that still doesn't solve all the poor decisions made previously. And since there were so many people who made the poor decision, there is clearly a structural issue.

I mean, why are we not all mad at our schools for not properly explaining what we're getting ourselves into? They claim to care about people and helping them become better citizens, right? I guess that doesn't include helping students make wise financial decisions (OK. I'm slightly bitter).

Some solutions
I don't want to be that guy who just knocks other people's ideas. It's only fair to come up with some of my own. You know, be part of the solution and stuff.
  • 10% Solution: why cap it at 10 years? It sounds good? Why not just say, "pay 10% of your income until it's paid off. If you're unemployed, nothing is due." You can always chose to pay more, but you don't have to.
  • Truth in Student Lending: Loans should be stated in their fully vested amount. Pick an interest rate & time frame for everyone. THAT'S the amount due. Paying off early doesn't reduce the amount, but losing your job doesn't increase it either. Plus, when a student takes out a $25,000 loan, they'll know that it's actually $40,000. Or, the government could not be greedy and charge a one-time 10% interest rate, $27,500 in this example, to cover the cost of servicing the debt. Students might actually consider getting a job while in school once they see the final amount.
That should help relieve current payment woes, it's pretty simple, and doesn't require the government to take on more debt by forgiving loans. Let's try to make it better future too by creating incentives to fix the real problem: school costs.
  • If schools can reduce their tuition relative to their previous 5-year average, the government will share the interest earned from past student payments after expenses to service the debt.

An example
  • I go to school and take out a $25,000 loan at 20% interest, or $30,000.
  • I eventually get a job for $60,000 net per year. I pay $500 each month (60,000 / 12 * 10%). It'll take me 60 months, or 5 years to pay it back (30,000 total / 500 payments).
  • If it only costs the government $5,000 to service this loan (I don't know the real amount, but someone does), there's $5,000, or $83 per month in this example of interest earned after the cost of servicing the debt.
  • (30,000 total - 25,000 principal - 5000 service cost = 5000 earned; 5,000 earned / 30,000 total = .166 return * 500 payment = 83 earned per payment).
  • $83 payments * 12 months = 1,000 per year the government can split with my school IF they reduce their tuition.
  • Again, this $1,000 a year is money above and beyond the cost of the government to provide this "public good": the good of society to have me educated.
  • So, if a school cuts their tuition by 10%, maybe they get 10% of the $1,000. FOR EVERY PREVIOUS STUDENT MAKING PAYMENTS. This could add up really fast for the school. Over time, past students will help the school fund future students, which is what giving to the school is all about. If the school can't reduce their tuition, no big deal, they just don't get the incentive.
  • Our government could get really crazy & offer an additional amount for the number of classes taught online: 10% of classes are online? Here's another 10%! Again, money above & beyond the cost of the loan.
  • Of course, that's assuming our wonderful government doesn't find another use for the money, like it's currently doing with the "war" money, and did with the social security money. Knowing that... I like this less. Shock: it all comes back to having a government that spends and saves wisely. If you don't spend less than you earn, doing great things is really hard!

Well Eli, thanks for prompting me to think deeply about this bill. It's been a while since I've stretched myself in this way. I think the bill has some good ideas, though I think it would be better with my tweaks (not including the lower tuition part, I like it much less.). I also think that until our government learns to spend more wisely, any plan is going to cause problems. Unfortunately, I don't see any evidence that any current leaders, or aspiring leaders, are that serious about our spending problem.

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