TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 28, 2018

WSJ: USC Alum Is One Of 101 Grads With $1 Million+ In Student Loans

WSJ 3Wall Street Journal, Mike Meru Has $1 Million in Student Loans. How Did That Happen?:

Mike Meru, a 37-year-old orthodontist, made a big investment in his education. As of Thursday, he owed $1,060,945.42 in student loans.

Mr. Meru pays only $1,589.97 a month—not enough to cover the interest, so his debt from seven years at the University of Southern California grows by $130 a day. In two decades, his loan balance will be $2 million.

He and his wife, Melissa, have become numb to the burden, focused instead on raising their two daughters. “If you thought about it every single day,” Mrs. Meru said, “you’d have a mental breakdown.”

Due to escalating tuition and easy credit, the U.S. has 101 people who owe at least $1 million in federal student loans, according to the Education Department. Five years ago, 14 people owed that much.

More could join that group. While the typical student borrower owes $17,000, the number of those who owe at least $100,000 has risen to around 2.5 million, nearly 6% of the borrowing pool, Education Department data show.

For graduate-school students especially, there is little incentive for universities to help put the brakes on big borrowing. The government essentially allows grad students to borrow any amount to cover tuition and living costs, with few guardrails on how the final sum will be repaid.

More than a third of borrowers from one of the government’s main graduate school lending programs have enrolled in some form of federal loan-forgiveness plan.

“These are choices. We’re not coercing,” said Avishai Sadan, dean of USC’s Herman Ostrow School of Dentistry, where Mr. Meru went to school and one of the most expensive in the U.S. “You know exactly what you’re getting into.” ...

Dental school is the costliest higher-education program in the U.S. Private nonprofit schools during the 2015-2016 school year charged an average of $71,820 a year, the Urban Institute found. The USC program now costs $91,000 a year, and $137,000 when living expenses are included. ...

Mr. Meru’s financial records—provided to The Wall Street Journal—show he borrowed $601,506, a debt that swelled to more than $1 million by fees and interest.

USC

The USC education helped Mr. Meru earn $225,000 last year working for a corporate practice in Draper, Utah, 20 minutes from Salt Lake City. That compares with a $158,000 median income for dentists, according to the Labor Department. ...

Mr. Meru met and married his wife while at Brigham Young, and he graduated debt-free in 2005. He picked the USC dental school for its prestige and because he wanted to live closer to his parents.

Mr. Meru said the dental school’s financial-aid director, Sergio Estavillo, estimated that the basic four-year program would require $400,000 to $450,000 in student debt, including interest. Mr. Estavillo said he didn’t recall the conversation but had no reason to doubt its accuracy.

Mr. Meru and his wife concluded dental school was a good investment, given the salary he expected to earn.

“We’re like, ‘Well, we can make this work,’” Mrs. Meru said. “There are certain things that are OK to go into debt for: a house, an education, a car.”

The newlyweds packed up for California. Mrs. Meru got a job at USC as an administrative assistant, which provided a tuition discount. ...

Mr. Meru then entered into a government-sponsored repayment plan based on income. He agreed to monthly payments at 10% of his discretionary income, defined as adjusted gross income minus 150% of the poverty level. Any balance remaining after 25 years is forgiven, effectively covered by taxpayers. The forgiven amount is then taxed as ordinary income.

Without the government help, Mr. Meru’s monthly payment would be $10,541.91, according to an email from his loan servicer. His current monthly income, after taxes, is roughly $13,333.

Since refinancing his debt with the federal government in 2015, lowering the rate to 7.25%, Mr. Meru’s balance has grown by $148,948. It will keep growing through the 25-year life of the repayment plan until it reaches $2 million. That sum will be forgiven and, at current tax rates, could cost Mr. Meru more than $700,000 in income tax payments. By then, Mr. Meru will have paid $1.6 million. That would be about the same as repaying his $600,000 in student loans at a rate of 4% over 25 years. ...

The government repayment plan affords the Meru family a comfortable life.

https://taxprof.typepad.com/taxprof_blog/2018/05/wsj-usc-alum-is-one-of-101-grads-with-1-million-in-student-loans.html

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Comments

I think the relevant fact is that the guy is mormon and had a big family which he borrowed money to support.

A better headline would be "Mormon with big family borrowed from feds to pursue an education."

Posted by: Mormon | May 28, 2018 10:30:01 AM

@Mormon,

One can only borrow up to the cost of attendance; most schools do not give students with families additional wiggle room. This is a case of an expensive school + an inability to keep up with interest. In other words, it's the future.

I also want to point out that the next story down features a law professor claiming that thanks to income-based repayments the balance doesn't matter, and just how tone deaf and incorrect that is.

Posted by: Unemployed Northeastern | May 28, 2018 1:23:22 PM

Quote: The government essentially allows grad students to borrow any amount to cover tuition and living costs, with few guardrails on how the final sum will be repaid.

And with examples like this one, it seems quite clear that some grad students don't have enough sense to borrow without someone (other than themselves) setting guardrails.

Posted by: Michael W. Perry | May 28, 2018 2:26:01 PM

The relevant fact is not the guy is Mormon and has a large family he borrowed money to support. According to the article he has two children and may or may not be Mormon. not everyone who attends BYU is Mormon.
That being said it seems as if there is a program that will allow him to pay less than his debt at taxpayers expense.

Posted by: David B Munnell | May 29, 2018 4:55:50 AM

@Mike,

Here's the link to the USC Dental School's cost of attendance: https://dentistry.usc.edu/programs/dds/cost-of-attendance/. I see nothing about giving a larger budget to students with families / dependents, but hey, that's probably just because that's not actually a thing schools do.

Posted by: Unemployed Northeastern | May 29, 2018 9:04:00 AM

People will game any government system to their advantage. Make minimum payments for 25 years and the balance is forgiven. What Me Worry? Insanity.

Posted by: Rivet | May 29, 2018 10:41:24 AM

I taught medical students for 15 years. Each year I would ask how many are using student loans for tuition (USC $57,000 / year). All would raise hands. I would ask "Is anyone interested in the military, which will pay the tuition ?" No one was.

Posted by: Michael T Kennedy | May 29, 2018 10:48:14 AM

Hey, Mike...You're welcome. -- The Taxpayer

Posted by: The Taxpayer | May 29, 2018 10:55:22 AM

Wait. It's going to be forgiven? Why?

Posted by: Joe Bar | May 29, 2018 11:07:53 AM

So, this loan forgiveness program is going to fund upper-middle-class lifestyles?
Not just the orthodontist, but the dental instructors at USC, the administrators at USC, etc.
If there weren't a way to get rid of the debt, how much would the dental school really cost?

Posted by: Half Canadian | May 29, 2018 11:40:58 AM

The debtors mentality: buy the fancy front loader washer for $900 when a standard $300 model will suit your family nicely. Heck, you can pay for it in easy installments.The universities know this and are taking advantage. If the government must subsidize the student's irrationality then the government should also claw back some of that jacked up tuition from the universities.

Posted by: Al W | May 29, 2018 12:53:08 PM

I didn't read the source article (paywall) but from the quoted excerpts: a) He was debt free in 2005. He was apparently looking at a 4 year program if the quote from the financial aid director is indicative. But according to the chart his _loans_ increased (not interest, the loans themselves) until 2012 ("final loan total"). 7 years later. And fully 50% of the "final loan total" happened in those last 3 years. Can someone explain from the article what happened after his 4 year program?

Posted by: David-2 | May 29, 2018 12:54:15 PM

Meru is mormon according to the article. Read the full article in the WSJ, not just the excerpt on taxprof.

If the loan balance really "didn't matter" there wouldn't be only 101 people in the whole country with loan balances above $1,000,000.

There would be tens of millions or hundreds of millions of people each with multimillion dollar student loan balances.

Posted by: Mormon | May 29, 2018 2:38:29 PM

From the full WSJ:

"Mr. Meru . . . was the eldest of three boys raised in Newbury Park, Calif., an affluent suburb west of Los Angeles. His father, who didn't finish college, owns a small construction business. His mother, a college graduate, worked mostly as a secretary. . . .

After high school, Mr. Meru, who is Mormon, spent two years on a mission in Brazil, then returned to the U.S. to complete his undergraduate degree at Brigham Young University in Utah. He paid his college tuition with money from his parents . . .

Helping pay for college was "the agreement we made all our boys," his mother, Karen Meru, said. Graduate school wasn't part of the deal. "We couldn't afford it," she said. "We're middle class.""

The fact that he's Mormon is critical. Mormons are expected to pay the cost of their own missions. He went to Brazil for two years, which is not cheap. And he came from a big family (3 children) and he and his wife had kids while he was still completing his education, which is pretty early for most educated professionals.

Again, hostility to IBR and big student loan balances is basically driven by a bunch of bigots saying that poor people and religious people and people with families don't deserve an education.

Posted by: Mormon | May 29, 2018 2:47:20 PM

@The random commenters whining about loan forgiveness:

When this guy graduated from dental school, his balance was a hair over $600,000. Paying $1,589 per month for the next 20 years adds up to $381,360. And then he gets a $700,000 tax bill from the feds on the $2 million "forgiven" balance, which will be considered realized income. If any of you think this is a great deal or cheating the taxpayer somehow, 1) feel free to follow in his footsteps and 2) I sure hope you spend a lot of time screaming about the tax bill Congress passed last year.

@Mormon,

The dentist's religion has nought to do with anything, as I can find no indication on USC Dental's tuition webpages indicating that you can borrow more if you have a family or dependents. Put the non sequitur down now. Also I should note that literally one story down from this in Taxprof one of your fellow law profs attempts to make the argument that the loan balance does not, in fact, matter. He's wrong, of course. But sadly this has been par for the course for years by law professors at schools good and bad alike - hawking IBR plans like car salesman hawk lease payments. When the GOP gets around to gutting these plans and throwing millions of college grads under the bus (which is a stupid strategy as 45 million adults hold student loans now and that's quite an imperious voting block, but they seem intent on it anyways), most of the collective ire will be aimed squarely at law schools and their marketers.

Posted by: Unemployed Northeastern | May 29, 2018 8:18:29 PM

@UNE

Students financial needs always take cost of living into account, which of course depends on the size of the family they need to support while in school.

More food, higher healthcare costs, higher rent, more transport cots, schooling for the kids, etc.

Posted by: mormon | May 30, 2018 3:24:35 AM

If IBR is cut, there will be three groups that take the blame
1) Whichever party does it (the democrats might surprise you)
2) The Gates Family and their foundation, which have been pushing for it
3) Lumina / Sallie Mae which has been pushing for it

Posted by: IBR blame game | May 30, 2018 3:29:33 AM

@Mormon,

Show me on USC Dental School's website where IT ALLOWS students to take out additional loans if said students have families / dependents. Because of course one cannot borrow more than the school's annual COA budget, and if they don't allow for additional budgeting for dependents, the students cannot borrow more.

Yeah, it's not hard to find who has been lobbying on and for the PROSPER Act. There are websites that keep track of such things, and the higher ed sites have been covering it as well. Surprise! Lumina is not among them.

Posted by: Unemployed Northeastern | May 31, 2018 9:29:51 AM

https://www.thecrimson.com/article/2018/5/2/faust-remains-concerned-legislation-reauthorization/

"Committee Democrats first learned of the contents of H.R. 4508 on November 29, 2017 when the Wall Street Journal published a series of online articles outlining key policies included in the bill.3 Committee Republicans unilaterally drafted the 542-page bill that was shared with Committee Democrats only mere minutes before the bill was formally introduced in the House." http://democrats-edworkforce.house.gov/imo/media/doc/HR4508_MinorityViews_FINAL.w.signatures020718.pdf

So yeah, I would be surprised if the Democrats voted for it. But that's only because I'm informed on these issues.

Posted by: Unemployed Northeastern | May 31, 2018 9:42:18 AM

Whoops, Crimson link contains the gem

"Terry W. Hartle, senior vice president of the American Council on Education—a major lobbying group for American colleges and universities—said he doubts the Higher Education Act will be reauthorized within the year.

Hartle said the PROSPER Act was pushed through the House committee on an entirely partisan basis at a time when Republicans had decisively seized the helm.

“The challenge in reauthorizing the higher education act is that this is a large, complicated piece of legislation that sooner or later requires bipartisanship and they don’t have much bipartisanship on Capitol Hill at present,” Hartle said."

I thought you read the Crimson?

Posted by: Unemployed Northeastern | May 31, 2018 9:43:27 AM

@Mormon - thanks for sharing that you have some odd axe to grind with Mormon students. You've said very little about Mormons and an awful lot about your own insecurities and biases.

Posted by: JustMe | May 31, 2018 10:23:27 AM

For those wondering, I'm sure a portion of the loan balance is for daycare expenses, which can be funded so long as the other parent is employed. The rationale is that if daycare expenses aren't funded, higher education would be off limits to parents, which isn't ideal.

Posted by: Anon | Jun 2, 2018 6:27:52 PM

The solution is simple. Chargeback universities for defaulted loans. After all, they're the ones who got the money.

Posted by: Dale Spradling | Jun 3, 2018 8:52:12 AM

Actually, it's the students who got the money which they used to pay for services that universities provided.

We don't charge a car company for a defaulted car loan or a home builder for a defaulted mortgage.

Posted by: IBR blame game | Jun 3, 2018 9:12:16 PM

@ Blame Game. If universities had some skin in the game, we wouldn't see PhD programs for music composition.

Posted by: Dale Spradling | Jun 4, 2018 7:08:23 AM

While there is plenty of blame to go around (irrational student borrowers, rent-seeking lenders, inept government agencies, and irresponsible colleges), there really are no true villains. Instead, the widespread availability of student loans has dramatically altered the market forces that set prices for higher education. Such easy availability was supposed to make it easier for working class and middle class kids to go to college, but instead it has made it much more burdensome. Good intentions, meet unintended consequences: http://www.nber.org/chapters/c13711.pdf

Posted by: Mike Petrik | Jun 4, 2018 9:12:01 AM

Ah yes, the IBR blame game: like how the media and politicians have excoriated how law schools and law school professors over their "Hey 0Ls don't even worry about the debt because your payments will be so low!" marketing. Yes, people like you are to blame for what's coming. Own it.

Posted by: Unemployed Northeastern | Jun 4, 2018 9:43:07 AM