Here’s an open question for college admissions officials—and forgive me the strangeness of it. Would you advise young people that college is accessible to everyone, even though student loans may cause financial hardship for years to come, and qualify them for what is in effect a federal welfare program?
Put that way, you might hesitate to urge a student to take on big debt to go to college.
However, thousands of college admissions officials tell students that college is open to all and suggest managing federal student loans with income-based repayment (IBR), or the Public Student Loan Forgiveness Program (PSLF).
Under IBR, borrowers are permitted to pay less than they would under standard repayment—no more than 10 percent of their gross income based on household income and family size. This keeps payments quite manageable. Borrowers also have the option of making no loan payments at all, provided they request a hardship deferral. Unfortunately, interest continues to accrue, growing their original balance.
To qualify for PSLF, borrowers must work full-time in public service jobs, for ten years. After that, they may apply for their remaining student loan balance to be forgiven. Public service jobs include working as a public-school teacher, police officer, postal carrier, firefighter, government attorneys, and medical professionals who work for public hospitals; among others.
The standard repayment period for a typical student loan is 10 years. This means that if the loan is not refinanced or consolidated; it will pay off in 10 years. To qualify for PSLF, the repayment period must extend beyond 10 years (if it did not there would be no need for the program because loans would have been completely repaid.) The borrower must enroll in IBR to qualify for a repayment period longer than 10 years. However, borrowers must be experiencing what is defined as “financial hardship” to qualify for IBR. Financial hardship is defined as loan payments that exceed 10 percent of gross income; given household income and family size. Part of the issue with IBR, is that loan payments may not even cover the interest accrued, much less the principle. This means the borrower may not reduce—much less pay off the balance of their loan.
When I was a first-year law student, my law school dean cited (as a success story), a law student who graduated from our institution and was presently working as a public interest attorney earning $45,000 annually, with a $100,000 in student loans. Under IBR, his payment was only $100 per month. Obviously, this didn’t even cover his interest much less reduce the principle balance. Thus, under PSLF, he had the “opportunity” to remain in debt servitude to the United States government; and after 10 years, an outside chance of having the slate wiped clean. Because the approval rate of loan forgiveness under PSLF, currently stands at 1 percent; that seems a risky proposition at best. If borrowers enrolled in IBR, do not qualify for PSLF; they may qualify for student loan forgiveness, after 25 years of IBR payments. However, this is treated and income and they will be presented with a tax bill that reflects this. This means that folks in their 50s or older, could face a massive tax bomb, while closing in on retirement.
It’s popular to blame state funding cuts to contributing to the high cost of college. Here’s a more likely explanation: with Grad Plus Loans (which are sponsored by the United States Department of Education, and are available to all graduate students not currently in default on a federal student loan) students can borrow the full cost of tuition and fees, plus living expenses. And that cost is determined by the school. A principle of economics is that prices will rise to match the level the market will bear. Thus, colleges have little incentive, and good reason to raise costs.
As a mom, I would do anything I could to help my children, or those of others. But federal student loans aren’t helping young people. They are, in many cases harming them. If I were a gambling man, eligibility for a federal welfare program is not a bet I would take.
Please counselors, tell student the truth about how profoundly a loan taken out early in life can affect their lives. This might mean exploring other colleges, or other options. And maybe getting the federal government out of the college loan business might be another good idea.