Today, the warnings concern a “college loan bubble.” Most people could care less.
But, taxpayers should care…and care a lot. The bottom line: A federal program to help student borrowers get out from under debt is going to cost taxpayers billions of $$$s.
Consider these fun facts, care of Bloomberg:
- Borrowers hold $1.2T in federal student loans. That’s the second-largest category of consumer debt, after mortgages.
- Of that $1.2T, $200B+ is in plans with an income-based repayment option. Of those loans, $190B were originated by the U.S. Department of Education after 2010 or bought by the federal government during the financial crisis.
- Both Moody’s and Fitch Ratings are considering cutting ratings for the securities tied to those loans. This is extraordinary, since the federal government guarantees the debt.
- For loans originated in 2015 or after, the programs will cost the government an additional $39B over the next 10 years, according to the Congressional Budget Office. That’s more than is spent annually the public scholarship program for low-income students (“Pell Grants”).
But guess who are the beneficiaries of the taxpayers’ largesse?
Well-off universities and colleges which can charge higher tuition as well as the students who attend them who can get their loans forgiven.
For example, the number of students using the Department of Education’s Grad Plus loans which finance advanced-degree studies has increased by 400% since 2010. About 50% of these loans are in income-driven plans meaning that borrowers--students who have graduated--have payments capped at 15% of income, with allowances for housing and other expenses. The Obama administration plans to expand the number of borrowers eligible for a payment cap of 10%.
According the Assistant Dean for Financial Aid at Georgetown Law School, Charles Pruett, alumni can “ignore” debt balances if they spend 10 years in government or nonprofit jobs, which would qualify them for early loan forgiveness.
And just who’s holding those loans and will forgive them?
Yep. The taxpayers.
For taxpayers, the loans are “a slow-ticking time bomb,” says Stephen Stanley, a former Federal Reserve economist who’s now chief economist at Amherst Pierpont Securities in Stamford, Conn.
The irony is, of course, that those who took out the loans in the first place will be the taxpayers picking up that tab.
Let the discussion begin...
To read the Bloomberg article, click on the following link: