Pay As You Earn Burns Taxpayers
The Obama administration has been touting new regulations on student lending that it argues could help borrowers “lower their monthly federal student loan bills.” The Department of Education’s website details changes to the income-based repayment option, which the administration argues will lessen the financial burden of attending college.
Under income-based repayment, monthly loan payments are capped at 15 percent of a student’s discretionary income, with any remaining balance being forgiven after 25 years.
If the amount a student is supposed to pay in a standard 10-year repayment plan exceeds the arbitrary 15 percent cap, borrowers are considered to have a “financial hardship.” Naturally, once a student qualifies for IBR, they remain qualified regardless of whether their financial situation improves. After 25 years, the remaining balance of the loan is forgiven by taxpayers. If a student goes into “public service” – i.e. government or non-profit work – upon graduation, loan forgiveness kicks-in after just 10 years.
Not content with that generous option, the Obama administration issued regulations in November revamping IBR. The new Pay As You Earn plan caps what students can be required to pay to just 10 percent of discretionary income. (Both the IBR and Pay As You Earn options apply to Federal Direct Student Loans).
But wait, there’s more! Under the Pay As You Earn Plan, taxpayers – three-quarters of whom do not hold a bachelor’s degree and presumably work in lower-paying jobs than their degreed compatriots – are on the tab for unpaid interest that accrues on Direct Subsidized Loans once students begin repayment, for up to three years.
Finally, under the new Pay As You Earn program, loan forgiveness begins after just 20 years – not 25 – and the 10 year forgiveness for working in public service still applies.
Even the New America Foundation calls Pay As You Earn a “huge giveaway to graduate students.” The Foundation’s Jason Delisle explained in an interview with Bloomberg Businessweek:
“We have one example of someone who might look similar to an MBA student. He starts out with a starting salary of $90,000 and by the end of 20 years is making $243,360. Under the old IBR program, he’ll have paid $409,445 by year 25 and be forgiven $23,892 of his loan balance. Under the new IBR repayment plan he’ll pay less than half of that, or $202,299, and be forgiven $208,259 by year 20. The old IBR plan was punitive if you borrowed a lot of money, made you pay more over time and trapped you, so there were serious consequences to doing that. It was a downside and a pretty big risk, which is why you didn’t see people borrowing without regard to how much it will cost. The new plan essentially eliminates any downside or risk for that type of behavior, and cuts payments in half and then some.”
Thus are the follies of central planning. Pay As You Earn means a successful MBA could have more of his student loans forgiven by taxpayers than the average taxpayer earns in four years.
The bottom line? Congress should pursue reforms that actually reduce college costs – something Pay As You Earn or any other federal subsidies won’t do. If federal policymakers really wanted to make college more affordable, they would stop the higher education spending spree, and decouple federal financing from accreditation. State policymakers can start by encouraging investment in 529 college savings accounts, shifting state schools to a competency-based model, and offering dual enrollment options.
Continuing to increase federal subsidies through artificially low interest rates, caps on repayment, and loan forgiveness allows colleges to spend recklessly and inflate tuition at breathtaking rates. As they say: the beatings will continue until morale improves. Or in this case, until the federal government stops feeding the college subsidy beast.