Thursday, December 2, 2010

Subsidized student loans in the crosshairs. Is IBR far behind?

Amongst the hubbub the past couple of weeks over the deficit commission's report, one proposal that hasn't gotten nearly as much press is the elimination of in-school interest subsidies for federal student loans. This is obviously less attention-worthy than some of the proposals, but for starving, jobless students and graduates, it's a big deal. Bigger still, the proposal to end interest-subsidized student loans suggests that a much newer and less-established program, Income Based Repayment (IBR), could be next to fall under the ax man's gaze.

Subsidized student loans have been taken as a given by students. IBR is a much newer program that is only fully available to those folks who are coming out of school after 2008. There are a number of formulas based on your income and ability to pay, and it only applies to federal loans. Basically, it works out that if you have a really shitty salary (or none), like many law graduates since 2008, you get a monthly repayment much lower than you would be looking at under a standard repayment plan. Also, by electing IBR, your outstanding debt is forgiven after 25 years, or 10 years if you work for a state/local government or qualified public interest organization. It's an okay program, and is helpful for unemployed, debt-pwnd students coming out of school during the Great Recession.

From what I can tell, the idea behind IBR was for graduates of expensive law and other postgrad programs who wanted to "pursue the common good" in public interest, to be given a break on their monthly payments in exchange for their selfless service. In the new reality of 50%+ graduating law classes being unemployed, it's more than likely going to become a catch-all for all of us with six-figure federal debt and no way to pay it back. All the while, the government will be eating the remaining interest on the loans, and if you make it to the 10 or 25 year mark, hey, forgiven! With so many unemployed graduates, the government is likely to be left holding a much heavier bag than they figured on when they were crafting IBR. For those un-and-underemployed recent grads relying on IBR, who's to say what will happen in 10 years, to say nothing of 25, as Erskine "Bowels" and his crew look for crafty new ways to close the deficit gap?

Personally, I don't care that the government is going to be saddled with more unpaid debt. It's not like it's "real" money; they just transferred some digits from their printing presses to the law school dean's office and our tuition showed up as "paid." The school pisses it away and modifies its ledger accordingly, but we're fooling ourselves if any real value is changing hands. That's another issue, though. The federal government created this student loan mess by guaranteeing tens of thousands a year in free money to prospective law students, thereby allowing schools to uniformly jack up their prices to around $50,000 a year. I have no sympathy for the feds if they are going to whine about the unintended consequences of IBR. I do, however, worry about their willingness to repeal the program and leave all of us debtors out in the cold.

Our one saving grace may be that, on the whole, the number of unemployable debtor law students is relatively small (compared to other federal obligations). In any given year, the number of people running up red ink for the feds via subsidized, low IBR payments or total discharge should be quite low. However, experience makes me wary. So many unfortunate law students have at least six figures in debt, particularly those who entered in 2008 and after and would be eligible for IBR, in the era where law school COA is almost uniformly ~$50k a year. It's not just law students, either. Every day we see more and more unemployed undergrads with six figure debt, and soon the crop of economic refugees who went for MBAs or other advanced degrees to try and dodge the bad economy of 2008 will be emerging, jobless. There are a hell of a lot of unemployed recent grads of all degree-stripes out there with six figures of debt and nowhere to go but back to school or onto the IBR rolls. If the in-school interest subsidy is on the chopping block, how long can it be before the IBR payment subsidy and eventual discharge are also scrapped?