Paul L. Caron

Monday, May 28, 2018

Brooks: The Case For Increasing Student Loan Debt — Expanding College Affordability By Expanding Income-Driven Repayment

John R. Brooks (Georgetown), The Case for More Debt: — Expanding College Affordability by Expanding Income-Driven Repayment, 2018 Utah L. Rev. ___:

Income-Driven Repayment (IDR) for federal student loans is rapidly becoming the primary tool that the federal government uses to provide progressive funding to individuals to pay for college. Under these programs, borrowers can choose to pay back their loans as a percentage of income, with eventual debt forgiveness after 10-25 years. If administered well, these programs can make student loans affordable for everyone, regardless of income. In this symposium essay, I argue that for IDR to meet its goal of providing affordable higher education to everyone, the federal government needs to raise the individual borrowing limits on Direct Loans and issue substantially more debt than it does today. This perhaps counterintuitive proposal — help students by increasing debt — follows from the observation that an IDR student loan is conceptually not at all like traditional debt and is more akin to a tax instrument.

If a borrower promises only to pay a percentage of income, the nominal amount of the debt is not as crucial. Furthermore, if a student cannot cover net tuition with federal student loans, the student may be forced to use private loans or to work excessively, which can lead to worse outcomes.

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"If a borrower promises only to pay a percentage of income, the nominal amount of the debt is not as crucial. "

Except that those forgiven balances is treated as realized income. Whoops. Let's not forget about that in our discussion of affordability. The WSJ actually had an article this very weekend on a mid-30s dentist who is holding more than a million in federal student loans (private dental schools can sticker at nearly $150k with living expenses, and the interest builds quickly while in residency and such). He's on IBR (duh), even with a $225k/year income. Per the paper’s calculations, by the time loan forgiveness comes around, his balance will be a bit north of $2 million and his realized income hit in the ballpark of $700,000. So when he is in his mid 50s, with house payments and kids' college bills, he's going to owe the IRS nearly 3/4 of a million dollars. But yeah, sure, "income-based payments mean no one has to care how much they borrow" is a serious argument we should take seriously.

Incidentally Georgetown Law stickers at $85,500 in total annual cost of attendance and 44% of students pay sticker (per their 2017 Form 509). Toss in tuition increases, interest, and bar expenses, and we're easily talking $280k or more by the time one passes the bar exam, exclusive of undergrad debt. Playing around with a PAYE repayment calculator, even if we presume such a Georgetown Law grad makes $150k/year on average for his or her career, with such a debtload on PAYE they would make $254k in payments over 20 years and have a forgiven balance of $361,390. Combined with that $150k income of theirs, that $361,390 in realized income will give them an additional tax bill of about $125,000, or MORE THAN IT WOULD HAVE COST TO PAY STICKER FOR A LAW DEGREE FROM GEORGETOWN TEN YEARS AGO. (2007-2008 tuition was $39,390). So that “not crucial” nominal debt can and will actually cost current GULC students the equivalent of a second, slightly used law degree from GULC.

Oh hey, did I mention that some proposals to the PROSPER Act would change IBR plans so that there is NO loan forgiveness? You'll just make income-based repayments until the balance disappears or until you die. So it effectively becomes an additional 10% income tax for life. But hey kids, like don't even think about it.

Finally, I would be remiss in not mentioning that some years ago another GULC professor – Phil Schrag, I think – made broadly similar comments about IBR meaning that the underlying balances don’t even matter and it was quickly picked up by the right wing think tank punditry as just another reason to gut federal student lending, which now Congress may or may not do before the midterms. You guys have to stop kneecapping yourselves.

Posted by: Unemployed Northeastern | May 28, 2018 9:41:26 AM