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?

50 comments:

  1. This is a very important topic.

    In Fact, An Extremely Important Topic for me, and perhaps many, many others in time.

    After default, I am on IBR now with Direct Loans.(The Federal Gov't)

    Don't forget that if the loan is "Abated" or discharged after 10 or 25 years, income taxes are owed on that very hefty, discharged amount.

    And that is where the IRS steps in to collect. Something to be feared, because the IRS has much more aggressive and effective collection tactics.

    So if the loan is 300 thousand, 100 thousand in Taxes will be owed perhaps.

    And according to a letter that I have from Direct Loans, getting into the IBR program is not a guarantee that one will stay in the IBR program.

    Also, a spouse is absolutely on the hook for IBR payments as well.

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  2. Gov is focusing on collections, instead of offering a loan interest free. They realize the similarities between sub-prime mortgages and guaranteed student loans without a credit check. They are gearing up to deal with our new indentured debt/citizens without our country collapsing.

    I would propose that guaranteed loans are no longer the way to go.

    Going forward, student loan approvals could work like this:

    1. Credit based approval system that takes into account student performance: There is overwhelming evidence that shows students that drop out of college, or have a GPA below a 2.5 by graduation have a statistically higher rate of default. http://www.tgslc.org/pdf/TAMU_Default_Study.pdf
    Evaluating the credit risk of a student should therefore account for academic performance.

    2. The rate of default has a correlation to major: For example, General Studies majors have about 14.7% default rate while Finance majors have a 1.8% default rate. We should recognize that certain degrees have diminishing returns career wise, and gauge the risk and reward of each (This does not mean extinguishing liberal arts, it will never go away, but we can't put kids $70,000 in debt if they have no viable way to pay it back)

    3. Cosigners and guarantee programs: In credit based loan approvals, freshman students are the highest default risk. To get approved they will need someone to cosign with them. This is where underprivileged kids get snagged up because their cosigners can't get approved. This is where "Guarantee" agencies come into play, somewhat like they did before. Guarantee agencies were in place state by state when the FFELP program was still in effect (FFELP is when Sallie Mae, Citibank, Wells Fargo etc would participate as a lender on behalf of the federal loan program. Guarantee agencies simply managed the payments to those companies when kids would default, but are now changing their business models now that FFELP is gone)
    Guarantee agencies would be in the business of the nitty-gritty, case-by-case approval of loans based on risk of the student. In cases where the student does not have a cosigner because of financial hardship, the Guarantee agency would step in and "cosign" for the student in exchange for a risk/reward return on the loan. The guarantee agency's money maker would be their "Academic bridge financing" by selecting good risk to cosign with, and rejecting loans on poor risk.

    Lets face it, traditional credit approval models for student loans are outdated. Lord knows we have enough technology and out of work finance people that we could modernize this system to better serve our students and our society's need for higher education.

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    Replies
    1. I don't think that would work: One, general studies is tiered, some programs have connections, it's an undergrad major (high school grades are not indicative of college grades), you are assuming that not all majors are largely scams, and, lastly, you assume there is non-biased information for students to make choices based on career outcomes--there isn't.
      What should happen is academia should be nationalized (like Europe/Canada/Australia) and seats funded based on career supply and demand. Profit taken out of the non-profit, so to speak.
      Of course, this will never happen in 'free' America, so the next best thing would be to have loans dischargeable again. Fees would go down, as federal loans have not been adequate to cover grad school for ten years. The libertarian PR troll solution is to get rid of gov loans, which would destroy any sense of meritocracy.

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  3. Just wondering if you could remove JD Underdog and Underdog, Esq. from your side menu. Thanks!

    ReplyDelete
  4. "...Let me put it even more baldly. Obama is, actually, a bad man. He didn’t do the right thing when he had a majority, and now that he has the excuse of a Republican House he’s going to let them do bad thing after bad thing. This isn’t about “compromise”, this is about doing what he wants to do anyway, like slashing social security. The Senate, you remember, voted down the catfood comission. Obama reinstituted it by executive fiat."
    -http://www.ianwelsh.net/obama-isnt-about-compromise/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+IanWelsh+%28Ian+Welsh%29

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  5. Well, I'll be out of IBR in 2035, when I'll be 75. How much of my Social Security check will they be able to garnish for taxes?

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    1. A lot, or all of it. And as has been pointed out, it doesn't work that way. Sometime in your fifties, you'll receive letters saying (a) your loan is gone and (b) you owe $100K in taxes, please pay now.

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  6. The banksters can garnish your SSI benefits, and apparently can do so without a court order. What a great system, huh?!?!

    In a rational world, getting rid of subsidized student loans would cause less to take on such debt. However, people are not very rational - especially when CONSTANTLY told they need to get more education.

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  7. I've thought about the issue of modifying the educational loan system for some time. I'm 6-figs in debt so I know your pain. These pigs (called schools of higher learning) keep jacking up tuition rates into the stratosphere so that deans and underworked professors can walk off with big salaries or build more buildings that no one really needs. The way to reverse this trend (and keeping the federal loan plan in place) is simple: impose caps on annual tutition increases, i.e., mandate that an college or university MUST not raise tutition above some nominal percentage, e.g., 2-3%, or else the school's students will NOT be elegible for federal student loan funding. With no federal funding for schools, schools will either have to abide by the 2-3% increase or go out of business. To me it's that simple, but no one in the federal government has suggested this as a possible solution to the current mess. Maybe they DON'T want to come up with a solution since everyone is getting rich of this scam.

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  8. If Rep Foxx has her way, we will all be under the corporate scam all over again. She must be stopped.

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  9. I always say that the biggest beneficiaries of law schools are NEVER the law graduates, but the law firms and other employers of law graduates.

    Another beneficiary of law schools is the faculty and the administration running the law schools.

    In this capitalistic society, why would the law school industry in general make the law graduates the biggest beneficiaries, when the people running the law industry are law firms, employers of law graduates, and the faculty??

    As a corollary, college education in the US mainly benefits corporate America, who are the employers of college graduates. Education in America produces workers for corporate America, not citizens for the society.

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  10. I dedicate this law school recruitment video to you and your blog. Keep preaching the truth! http://www.youtube.com/watch?v=3RtHywad7Vo

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  11. The only options left for many indebted graduates is to take a job in the public sector and have loans forgiven in 10 years or work abroad so your income will not affect IBR. That's really all you can do. Otherwise you will spend the next 25 years paying off interest and loans with most of your income if you're lucky enough to find a decent paying job.

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  12. I can definitely see them getting rid of the 10 year Public Loan Forgiveness option, although to be honest, it's hard enough to get a public job anyway. Everyone wants a government job to begin with, that isn't the problem. Most of those government jobs actually pay well enough that you can pay off your loans as well (about $60k a year, which you'll hit in the government within a few years if not right away).

    It's all the rest of us that are screwed. The people that can't get government jobs or anything else. Private sector jobs routinely pay $50k or less (shit law) and even those jobs are competitive.

    IBR and loan forgiveness should be reworked to a 10 year payoff for EVERYBODY, unemployed, barely employed, etc. Either that or let us declare bankruptcy, and that'll be on our records for 7 years anyway.

    ReplyDelete
  13. DO NOT, I repeat DO not go to law school. Not only will you fork over a boat load of cash, endure hours of banal lectures given by a group of meritocracy assholes, but the likelihood of getting one of those Hollywood glamour corporate positions is pretty slim, since you will have to be at the top five positions of your graduating class. Moreover, the state bar examiners can be real assholes if you have ever pissed one of them off. This coveted network of old camaraderie can literally keep you out of the game no matter what your score is on the bar exam. When you challenge the bar examiners, they will lie and make sure their dirty little secrets never service. Then you will be stuck with hundreds of thousands of student loan debt you will never ever be able to repay. Since there in zero demand for lawyers, and America is operating with a glut of lawyers, stay far away from law school! That is and unless it is your personal lifetime goal of obtaining a J.D., your father, brother, sister, aunt, uncle already has been practicing law for decades and they will grandfather you in their firm, or you like working for $11,000.00 per year handling military divorces, criminals, or getting stiffed on your fee.

    ReplyDelete
  14. Computers are going to replace are lawyers eventually. Its just a matter of time. But why risk 50k a year on law school when you can spend 4k a year. Read about it on my blog!
    ABA NO Way! The NON ACCREDITED Law school racket is not a complete scam! :)

    http://abanoway.wordpress.com/

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  15. This comment has been removed by a blog administrator.

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  16. Just sell drugs - it's a much safer path to riches.

    ReplyDelete
  17. I enlisted in the army 7 years after graduating law school. Single best move I have done. The pay is crap but I had to enlist because my student loan default made officer candidate school impossible. Now I have been able to take advantage of the army Student Loan Repayment Program ($65K before taxes over 3 years), IBR which has made it possible for me to join the military which would not take me if I had to actually repay my loans since they don't want anyone who has finanacial obligations exceeding the tiny military salary, and eventually I plan to take advantage of the 10 year public service loan forgiveness for which my military service qualifies and it is a non-taxable event.

    All I have to do is either stay in the military for 10 years (a fairly depressing prospect but infinitely better than being an unemployed law school diploma holder--let's face it, you are not a lawyer unless you are actually practicing) which I may do if I can go to OCS which is now a prospect since I was able to fix my loans and credit enough to get a security clearance, or find a government job after completion of my obligation (~18 more months) which is a dream situation in this economy.

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  18. A private student loan is also considered as an alternative student loan. You can take a private student loan from a person lender or any bank. The rate on these loans is generally higher than the government loans and the repayment schedules are not much suitable.

    ReplyDelete
  19. How will a subsidized loan really help in making a student loan more reliable and effective? Haven't tried that method ever since I've started loaning so I still don't have the right knowledge with regards to this matters.

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  20. Subsidized loans are federal student education loans for qualified learners to help cover the cost of college at a four-year university or college, college, or trade, career, or technical school.



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