Posts tagged ‘IBR’

February 25, 2015

Are we seeing a ‘big quasi-bailout’ for student loan borrowers?

by Grace

The Obama administration projects that the increased use of student loan forgiveness programs will cost taxpayers $22 billion next year.

… Primarily because of the recent growth in enrollment in the program, projected long-term revenues from the federal direct student loan portfolio were reduced by almost $22 billion compared with the best guess from the previous year….

This looks like ‘a big quasi-bailout’

That’s a big quasi-bailout, increasing the deficit nearly 5 percent. The White House budget office was unaware of any larger re-estimates since the current scoring rules for credit programs went into effect in 1992. As a January Politico Magazine feature on the government’s unusual credit portfolio reported, the Federal Housing Administration has stuck more than $75 billion worth of similar re-estimates onto Uncle Sam’s tab over the last two decades, most of them after the recent housing bust led to a cascade of FHA-backed mortgage defaults. But it’s never had a one-year shortfall quite as drastic as this.

Borrowers are made out to be innocent victims of “circumstances beyond their control”.

Regardless of which accounting method is used, the federal government is expecting to write off billions of dollars in future student loan balances under the program in order to reward public service employment and protect borrowers from economic circumstances beyond their control.

It’s not as if a student loan bailout should come as a surprise.  Here’s a question from 2011.

Is a student loan bailout inevitable?

20110913.COCCollegeLoanGrowth

Seeing the trend lines, Mark Gimein wrote this four years ago.

Eventually both private lenders and the government will be on the hook. The government has already moved to ease some loan terms. It will need to find more, especially for those snookered into paying for degrees worthless in the job market. The private loans, meanwhile, will simply blow up. We may as well start figuring now how graduates, taxpayers, lenders, and schools will split the bill.

Taxpayers just took on $22 billion, and there’s probably more to come.

Related:  “Politicized federal student loan program bails out ‘deadbeats’”

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Kevin Carey, “Flip Side of Reducing Student Debt Is Increasing the Federal Deficit”, New York Times, February 10, 2015.

Michael Grunwald, “The College Loan Bombshell Hidden in the Budget”, Politico,  February 05, 2015.

January 20, 2015

Student loan forgiveness is rising, with taxpayers paying the tab

by Grace

More student loan borrowers are getting a break as taxpayers take over repayment of their debt.  The administration’s policy on this matter is described by the Wall Street Journal:

First encourage more student debt, then promote nonpayment.

One of the slow-rolling and under-reported government debacles is the rising amount of student-loan debt that is guaranteed by taxpayers and will never be repaid. Thanks to the federal takeover of the student-loan market in 2010, the Education Department now stands behind more than $1 trillion in outstanding debt. Less well known is how the same federal government that has promoted and subsidized this debt is also scheming to make sure it doesn’t have to be repaid.

Income-based repayment programs are one way for borrowers to shift responsibility over to taxpayers.

So-called income-based repayment programs reduce a borrower’s monthly payments and then forgive the remaining principal after a period of years. Graduates who choose the nonprofit and government jobs favored by the President can have their loans forgiven entirely after 10 years.

Participation in expanded government debt relief plans has doubled over the last year.

The Obama administration greatly expanded benefits under income-based repayment plans in recent years and has launched efforts to promote them. Enrollments are growing rapidly and now stand at an all-time high. Some 24% of Federal Direct Loan Program balances ($115 billion) that have come due are enrolled in the two most generous plans, Income-Based Repayment and Pay As You Earn. That is up from 14% a little more than a year ago. The number of borrowers using the plans has doubled over that time, to 2.2 million.

At the same time, default rates are trending upward.  This at a time when the economy is supposedly improving.

Student loans are promoted for everyone, regardless of qualifications.  And loans are being made easier “not to repay”.

This all makes sense, however, when you realize that the student-loan program has been designed to achieve two political goals: Loans should be available to any student, at any school, pursuing any credential; and student debt is bad and burdensome, so it should be easy for borrowers not to repay.

Based on these goals, the program is performing quite well for students and the institutions whose coffers swell under such loose lending standards. Loan issuance has grown rapidly in recent years while repayment rates have declined steadily. From the perspective of the taxpayers who must ultimately finance these liabilities, however, the federal student-loan program is performing badly and steadily getting worse.

Here is another prediction that IBR schemes “will dramatically increase in 2015”.

Use and availability of income-based repayment (IBR) schemes, which set repayment expectations at a set percentage of the student borrower’s post-college income, will dramatically increase in 2015. This is because policymakers have narrowly defined the student debt problem as a problem of student borrowers struggling to keep up with payments (i.e., avoid default). Therefore, setting payments at a more affordable level would seem to resolve the problems student debt creates….

William Elliott III
Founding Director of the Assets and Education Initiative at the University of Kansas, School of Social Welfare and an expert on student debt

Meanwhile in New York, Gov. Andrew M. Cuomo will propose new legislation to forgive the student debt of thousands of college graduates.

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“Your Taxpayer Tuition Bill”, Wall Street Journal, Dec. 30, 2014.

Jason Delisle, “The Hidden Student-Debt Bomb”, Wall Street Journal, Dec. 30, 2014.

NPR Ed Team, “Kindergarten Entry Tests And More Education Predictions for 2015”, NPR, Jan. 3, 2015.

Kate Taylor, “Cuomo to Offer Plan to Cut College Graduates’ Debt”, New York Times, Jan. 3, 2015.

April 1, 2014

Turbo Tax being used to promote income-based student loan repayment

by Grace

The federal government has begun to use Turbo Tax to promote income-based and other income-dependent college loan repayment programs.

The new push from the Departments of Treasury and Education uses tax time to promote the opportunity for a borrower to have their entire debt repaid after 20 or 25 years. The agencies are partnering with TurboTax, the tax software used by more than 18 million Americans, to advertise the deal….

Turbo Tax users will see information about loan repayment options and a link to the Department of Education website in a section of the program called “My Money Tools.”

They are provided with a link to a calculator that uses tax information, including their adjusted gross income, marital status and household size to determine eligibility for income-based and other income-dependent repayment programs.

The options allow qualified borrowers to lock-in monthly payments that are determined by how much they make, not how much they owe.

This new marketing push coincides with the upcoming introduction of more generous taxpayer subsidies for student borrowers.

Those graduating after 2014 will have the option of applying to an even more generous program Congress passed in 2009 that would set payments at 10 percent of discretionary income for 20 years. After that, the loan is forgiven.

The Turbo Tax promotion comes after the Obama administration and other supporters expressed concern that not enough borrowers were taking advantage of Income Based Repayment (IBR), a student loan forgiveness program.

Kelsey Snell, “Student loan debt deal comes with tax catch”, Politico, 3/26/14.

Related:  Federal student loan programs create perverse incentives (Cost of College)

August 29, 2013

A checklist before you take out a student loan

by Grace

From the Wall Street Journal comes 5 Things to Know Before Taking Out a Student Loan

1. Research what aid is available to you—including scholarships, state and federal grants, and then federal loans. Meet with your school’s financial-aid counselor to learn these options. Visit the government’s website. The private website http://www.Finaid.org also has good resources.

2. Know the terms of your loans. What is the interest rate, what is the repayment period, and when precisely will payments begin? More importantly, find out what your expected monthly payment will be upon graduation….

3. Once you take out loans, be aware that this debt will not go away until you pay it. Federal loans are often called “aid,” but they are not grants—they must be repaid. Also, it is extremely difficult to discharge student loans—federal or private—through bankruptcy….

4. Look up information on your institution. Don’t just find out your school’s overall ranking or graduation rate. Also look up its “three-year cohort default rate,” a figure intended to show how many students pay back their loans within three years of graduation. That reflects how many students from that school are finding work and decent pay. Information on your school, including default data, can be found here.

5. Look up the earnings potential of your major. This website has information on different careers, including average salaries. Consider whether your debt load is too high relative to the expected earnings of your chosen field.

Also check out loan forgiveness options.

I’ll add another item to this list.  Be sure to research the most recent federal student loan relief programs that reduce loan payments based on a percentage of income, subsidize interest charges, and forgive loan balances after 25, 20, or 10 years.

Income-Based Repayment Plan (IBR)
“… a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size.”

Public Service Loan Forgiveness Program
“Under this program, borrowers may qualify for forgiveness of the remaining balance of their Direct Loans after they have made 120 qualifying payments on those loans while employed full time by certain public service employers.”

Keep in mind that these taxpayer-funded programs are expected to benefit higher-income borrowers the most while offering only marginal assistance to low-income borrowers.

 “If you are high-income and have a lot of debt, this is a huge giveaway.”

And some advice from Glenn Reynolds:

There are a few circumstances where student loans may be justified, but they should be viewed with extreme distrust.

Related:  Not enough borrowers take advantage of Income Based Repayment’s ‘mind-boggling’ generous benefits (Cost of College)

May 30, 2013

Not enough borrowers take advantage of Income Based Repayment’s ‘mind-boggling’ generous benefits

by Grace

The Obama administration and other supporters believe that not enough borrowers are taking advantage of Income Based Repayment (IBR), a student loan forgiveness program.  However, since it is higher-income college graduates who “ultimately end up benefiting overwhelmingly from IBR”, I’m not sure this is a problem.

IBR reduces loan payments based on a percentage of income, subsidizes interest charges, and forgives loan balances after 25, 20, or 10 years.  It sounds like a nice deal.  However, knowledge of the IBR “remains a largely obscure concept for many cash-strapped college graduates”.  It is estimated that only about one-half of qualified borrowers are taking advantage of this free money.

… according to DOE data as recent as January, a little more than 2.3 million borrowers had applied for IBR nationally, a small fraction of the estimated 38 million Americans with outstanding student loan debt…

Such low figures have shone a glaring spotlight on the DOE’s failure to sufficiently educate borrowers, according to consumer advocates like Mark Kantrowitz, the publisher of FinAid.org and FastWeb.com, who estimates that as many as 3 million students could qualify.

Hypothetical examples generated by using the New America Income-Based Repayment Calculator show how forgiven loan amounts can reach into the six figures.  (All numbers are approximate.)

Loan amount:  $70,000 combined undergraduate and graduate
Income:  $40,000 initially with 2.5% annual increase

Without IBR:  $550-600 monthly loan payments with total repayment cost of $165,000 including principal and interest

With Old IBR:  $300 monthly loan payments with total repayment cost of $98,000 including principal and interest  —  Savings = $65,000

With New IBR:  $160-170 monthly loan payments with total repayment cost of $49,000 including principal and interest  —  Savings = $115,000

Old IBR applies to initial loans dated on or before October 1, 2007, while the more generous New IBR applies to loans after that date.

The millions of borrowers who qualify but do not participate are “effectively leaving a rather sizable amount of money on the table”.  Some of the most generous IBR benefits go to graduates who take jobs in non-profit or government sectors because their loans are forgiven after only ten years.  Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, advises college graduates to take advantage of this benefit.

“If you plan on doing any kind of public service, nonprofit or government work,” said Delisle, “then you should borrow as much money as [your school] will possibly let you.”

Under the New IBR, a student who owes $70,000 upon graduation would end up paying back only $22,000 if he stayed ten years at a government job with a starting salary of $40,000.  That’s a savings of $143,000 compared to how much that graduate would have paid had he not taken the IBR option.

Indeed, the IBR savings that accrue to borrowers who pursue such career paths can be mind-boggling.

IBR produces “far more benefits” to higher-earning graduates.

But it’s not only those who work in public service professions who benefit disproportionately from IBR, according to Delisle. “The program provides far more benefits to those at the higher end of the income spectrum,” he noted, such as doctors, lawyers and those with MBAs.

“While the program provides very large subsidies when your income is low,” he said, “it really doesn’t claw those benefits back if your income ends up being high,” meaning graduates with large sums in student loan debt—ordinarily graduates of medical, law and business schools, who typically make higher starting salaries—ultimately end up benefiting overwhelmingly from IBR.

So a student who graduates from Harvard Law School with $150,000 in student loans and goes to work at a law firm making close to six-figures annually still stands to receive a “windfall”—as Delisle calls it—of six-figures in principal and interest forgiven on average.

IBR cheerleader says everyone should borrow for college because the taxpayers “pick up any downside risk or loss”.

Because of IBR there’s “no reason not to pursue a graduate degree and borrow to pay for it,” said Delisle.

“There’s only upside, because the government is stepping in to pick up any downside risk or loss,” he said. “It’s mind-blowing how generous income-based repayment really is.”

Sounds like a lousy program to me, speaking as a taxpayer.

Related:  Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers (Cost of College)

December 20, 2012

Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers

by Grace

The new and improved Income Based Repayment (IBR) plan that went into effect last month is expected to benefit higher-income borrowers the most while offering only marginal assistance to low-income borrowers.

…  the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default.

Rather, the changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.

Changes to produce more generous IBR provisions were expedited by the Obama administration to take effect two years earlier than originally planned.

At least one financial planning firm, the Advantage Group, is capitalizing on the IBR features by advising clients on how they can avoid paying back portions of their student loans.

“Stop wasting your money on student loan payments,” says the Advantage Group Web site. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690.

But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.

Terry DeMuth, chairman of the Advantage Group, said the firm was simply trying to help its clients benefit from the program.

A “huge giveaway” for high-income borrowers

The New America Foundation report recommends that the administration make changes that would focus the benefits of income-based repayment on lower-income borrowers and limit those for borrowers earning big incomes.

“If you are low-income, it doesn’t really give you a big bang,” said Jason Delisle, one of the authors of the study, which estimates that monthly payments for low-income borrowers would drop to $20, from $25, under the changes. “If you are high-income and have a lot of debt, this is a huge giveaway.”

Mark Kantrowitz, founder of finaid.org, a Web site about college finances, disputed the way the New America Foundation calculated some of its numbers. Nonetheless, he said he agreed with the premise.

“The design of the plan has the potential to misdirect some of the subsidies towards people who will be earning fairly substantial incomes,” he said. “The improvements don’t benefit the low-income students as much as the high-income students.”

A “moral hazard”?

JASON DELISLE, DIR., FED. EDUCATION BUDGET PROJECT, NEW AMERICA  FOUNDATION:  You’ve got a moral hazard.  You’ve got an incentive to borrow away knowing that you’re not going to have to pay it back.

SYLVIA HALL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here’s how it can be a problem—graduate students can borrow an unlimited amount of money to pay for school.  They start their careers with small or moderate salaries, making monthly payments of 10 percent of their income.  But remember, grad students often become very high earners, like doctors and lawyers.  As their salaries increase, the monthly payments on the student loans are capped based on the borrower’s debt at graduation.  That means when the debt is forgiven, there could be a whole lot left.

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How Much Student Loan Forgiveness Would Senator Rubio Qualify for Under New IBR Repayment Plan?

Senator Marco Rubio (R-FL) just announced that he paid off his student loans early with the proceeds from a book deal. Paying down debt ahead of schedule is generally a prudent financial move. But if the Obama administration’s new Income-Based Repayment (IBR) plan had been in place when Senator Rubio graduated from law school, his decision to pay down debt early would have been a sucker bet….

We estimate that if the New IBR plan were available back in 1996 when Senator Rubio started repaying his student loans, he would have $83,482 forgiven in the year 2015….

Don’t forget that forgiven student debt is taxable income, at least for now.

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