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Thursday, August 23, 2012

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.

11 comments:

  1. I believe you have a little typo in there. "was talking real month this time."

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    1. Good catch! Thanks. Proofreading is getting short shrift these days.

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  2. Excellent work. Just discovered you. Obama is so generous with taxpayers' money.

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  3. Excellent work. Obama is so generous with taxpayers' money. I just discovered your blog.

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  4. "That most delicious of all privileges -- spending other people's money." - John Randolph of Roanoke

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  5. Your argument is [expletive deleted], you presume that reducing monthly payments and using Obama's plan will result in a student "not shopping around" and not paying off their student loans even after 20 years! At no point in your article do you attempt to prove your connection between your statement. You make a false cause and your emotionally laden manipulative statements "I told you the Obama administration was talking real money this time." do not fill in your lack of evidence supporting your argument My students loans are deferred and other people I know have reduced their payments with consolidation but we still make our payments when we can. Having huge students loans affects all aspects of your life, you cannot get credit cards, its harder to get a mortgage and you cannot go back to school for another degree and get any federal help until you pay off your loans. THERE are your incentives to pay. Now unless you have hard figures to show that a predominantly large number of students CHOOSE not to pay off their debt after 20yrs due to the promise of debt forgiveness you have LOST this argument.

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    1. I published the above anonymous comment in full after deleting the profanity.

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    2. I generally don't respond to comments, but rather allow them to speak for themselves. However, since you asked...

      http://pjmedia.com/instapundit/149330/

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    3. This article does not make your case that students are intentionally defaulting on their loans. It seems to imply that students are using their grandparents as co-signers on loans but at not point states or claims that the seniors money is being docked due to the student INTENTIONALLY refusing to pay their loans off.

      Yes student loan debt continues to grow, there are many trends that may be the cause of this. Here are a few your cherry picked article chooses to ignore. Rising tuition costs, the increase in college access, the increase in for-profit colleges which provide lower quality education resulting in the graduate being even less able to find work and pay off the debts, states cutting funding to public universities, etc.

      Your article was not about rising student debt it was making the assumption that students would CHOOSE to default. So back yourself up already if you can.

      Are you seriously deleting an expletive, how pathetic. The expletive was one common among kindergardeners and another term for excrement that starts with c. I dare you readers to figure it out for yourself. Trying to make a drama out of nothing is sad. Now make a real argument if you can with FACTS!

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  6. I am impressed, I've to say. I hardly ever discover a blog that is both informative and entertaining. And let me inform you, you might have hit the nail on the head. I am very completely satisfied that I stumbled throughout this in my search for something regarding it.

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