Some background: Currently, two federal loan repayment plans are involved. But, the most popular is Pay As You Earn" (PAYE), which the Obama administration redesigned by in 2011:
- Student borrowers pay 10% annually of their discretionary income (that's income above 150% of the poverty level) back in monthly installments.
- After 10 years, the government forgives any unpaid balances if the student works in the public sector or for a nonprofit. For private sector workers, that debt is forgiven after 20 years.
- Currently, there is no limit on debt eligible for forgiveness. In March 2014, President Obama proposed to cap the amount of debt eligible for forgiveness at $57.5k. Why? The estimated cost to the government is going to be $14B/year.
According to the Wall Street Journal, here's how PAYE really works.
- Max Norris, who graduated from the University of California's Hastings College of Law, makes $60k/year.
- He pays about $420 a month to the Education Department on his $172k in debt, which fails to cover the interest owed. But his out-of-pocket expense falls to $100 monthly after aid from his school. After 10 years of working in the public/nonprofit sector and his salary rises 4% annually, Norris will have a total of $225k in debt forgiven. Norris fully intended to take advantage of this program from the outset: "My intent the whole time in going through law school was to take advantage of this program."
- Some law schools--including Columbia University, University of Chicago, and Georgetown University--have started offering their own plans to students, guaranteeing to cover their graduates' loan repayments until their debt is forgiven. Annual tuition is $50,890 at Georgetown Law. Its Dean, William Treanor, views steering graduates to public-service jobs as part of its Jesuit mission. The school, which assists only those who go on to work in the public sector, spent about $2M last year covering payments for those in the federal program. In 2013, 432 Georgetown graduates were in the program, up from 264 in 2012. Georgetown's law school website even has advertised how its student aid plan, when combined with the federal plan, "means public interest borrowers might not pay a single penny on their loans--ever!"
What a deal! Students line up at the federal trough and the government pays for them to go to college and graduate school. Better yet, Alma Mater will cover loan repayments until the loan debt is forgiven! Why? The federal $$$s provide current cash flow in the form of tuition payments to the institutions. With the cost of education less than the sticker price the institutions are being paid, they're making a tidy sum on each student, courtesy of Uncle Sam.
The dirty little secret, of course, is that 10 and 20 years out, those graduates will be paying prohibitively high taxes not only to cover the cost of running the government and its numerous "entitlement programs"--like PAYE at the cost of $14B/year--but also the interest on the national debt incurred for all of those so-called "freebies."
Socialism is great when you're a beneficiary because everybody else is paying. But, as history has taught conclusively, "There's no such thing as a free lunch."
Let the discussion begin...
To read the Wall Street Journal article, click on the following link:
"Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition."