The Great Student Loan Giveaway

    The last time President Obama talked about saving money for student loan recipients, it turned out to be a windfall of 25¢ a day.  This time around, eleven weeks from the election, the president is talking some real money.  Tuesday morning, this tweet went out from @BarackObama:

The link is to a new page set up by the Obama campaign to explain the president's Pay As You Earn proposal.  (I noted this page already in a post that was picked up by Paul Bedard of the Washington Examiner.) The main feature of the plan is that it "caps monthly federal student loan repayment at 10% of monthly discretionary income[.]"  Here is one of the examples provided by the Obama campaign:

A savings of $8,841 per year certainly sounds good. But as it turns out, that's not the half of it.  This savings of $8,841/year translates into $737/month.  This means that without Obama's plan, this doctor's monthly student loan payment would be $737 + $644 = $1,381.  We can check this using the handy calculator also provided on the site (click to enlarge):

Working backwards, a $120,000 loan with a "standard 10-year payment" of $1,381 per month reveals an assumed interest rate of about 6.75% (apparently this is not based on the halved Stafford student loan rate that garnered so much attention two months ago.)  And what is the monthly interest at 6.75% on $120,000?  $675.  That's right.  The doctor earning $100,000 per year does not even have to cover the monthly interest on his debt.  Based on this payment, the debt will literally never be paid off.  (Yes, the doctor's income is likely to increase, but he could also lose his job.)  After 20 years, the balance on the loan will have actually increased to $135,667.  [Even using the artificially reduced, below-market Stafford interest rate of 3.4%, the doctor would still owe $15,712 after 20 years.] However, not to worry!  Another key feature, oddly missing from this website but included in the White House's explanation of the proposal, is that it "will forgive the balance of their debt after 20 years of payments."  I told you the Obama administration was talking real money this time.
    This example is not isolated.  If we run the same scenario with the teacher example provided, the $15,000 debt will have grown to an astounding $34,900 after 20 years. [With the reduced Stafford loan rate, the debt would still be $14,142.]  And what about the single college student who takes the president's advice and rejects Mitt Romney's advice to "shop around" for a college education he can afford?  Say our composite student goes all out and maxes out student loans at $150,000 and it pays off.  He lands a $100,000/year job:

While earning $100,000 per year, our single graduate only has to pay $8,328/year in student loan payments.  After 20 years of this, his debt of $225,683 can be forgiven by the government.

    One of the ironies of this plan is that while touting it, Obama often notes that he and his wife only paid off their loans 8 years ago, almost 20 years after leaving college.  Yet this plan gives no incentive to ever pay off the loan, much less do it before 20 years is up.  And for all the talk about "making education more affordable," this plan has the perverse effect of giving no one any incentive to reduce the cost of college.  The students do not have to worry because their payments are capped.  And the colleges do not have to lower costs to compete for students because the students do not have not worry about the cost.

    But the greatest irony of all might be this tweet from the Obama campaign:

"Reduce the deficit."  A plan that could turn out to be the largest debt forgiveness plan in history will "reduce the deficit."  The deception is audacious and staggering.  The CBO recently reported that the current fiscal year will see the fourth year in a row of one-trillion-plus federal deficits.  If this plan goes through, we may look back at one-trillion deficits with nostalgia.