Student Loan Stimulus Plan – You Pay as I Earn?

Before the end of this year, total student loan debt will surpass $1 Trillion ($1,000,000,000,000).  For the first time, student loan debt will surpass nation-wide credit card debt.  There is a really good reason that some analysts are calling the student loan debt situation the next financial bubble.  Pretty soon, it will pop.  But that’s another story for another day.  So what is President Obama doing about it?  Here are the details:

First, a little history.  In 2009, the federal government took over all student loans.  From that time, students have borrowed directly from them, where beforehand, a student would borrow from a combination of federal student loans and private student bank loans.  Obama was one of those who argued that if the federal government took over student loan borrowing, the system would become more efficient.
As the repayment system currently stands, students typically pay 15% of the total loan value including annual interest at a fixed rate, which varies from 5 to around 8% on average.  So that’s where we are, but where are we going?
President Obama’s new plan would take the average 15% repayment of the total loan, down to 10% of the debtor’s income, not the amount of the loan, and that’s as long as the debtor is earning annually above the poverty level.  The new plan, called “pay as you earn,” doesn’t specify about what those below the poverty line will pay (if they pay at all).  Also, the longest that anyone will pay under the new plan is 20 years.
Here’s a quick example:  Say Alex wants to go get a PhD.  Alex takes out $200,000 after all is said and done.  Typically, those who hold a PhD are high earners, but all Alex wants to do is teach middle school philosophy.  Lucky for him, he only has to pay 10% of his income, so Alex, making $38,000 per year, will only pay $3,800.  Well, actually not.  You see, under Obama’s plan, Alex doesn’t actually pay 10% of his income, but 10% of his income after $10,890 of poverty-level income is subtracted from his yearly earnings.  So Alex would actually only pay $2,700.  Stay with me here.  Remember, under the old (current) system, Alex would have been responsible for $30,000 or more if you include interest. So, after 20 years and a couple raises, Alex would have his loans totally forgiven after paying somewhere around $60,000 out of the $200,000 he borrowed from the feds, which leads to another point.  The money being borrowed is taxpayer money.  Your taxpayer money.  You made an investment in Alex of $200,000, and you lost $140,000 (or more if you count inflation and interest), but Alex gets to keep his degree (and the $140,000 that you are on the hook for).
What this plan is doing is creating an even deeper entitlement for our entitlement generation.  The basis that the President claims to build his plan on is to make higher education more affordable for more people.  If that’s true, then higher education facilities will raise tuition prices.  As they raise tuition, it will be more and more difficult every year for a student who wishes to work hard and pay his/her way through college, and more debt will have to be taken on if a student wants to obtain a college degree, which is becoming increasingly more necessary as the job market evolves.  But that debt now is accompanied with a mindset: “I don’t have to pay it all back, so why should I worry about how much debt I take on?”  That mindset will drive a student further to studying a degree that basically leads to nowhere instead of focusing on a degree that will allow them to specialize in a competitive field, such as engineering, hard sciences and business.  “The government will take care of me,” that millennial says.  Well, it’s not the government, it’s the tax payer.  The way I see it, this new plan is a disaster waiting to happen, and although college grads will enjoy a few more bucks in their pocket at the end of every month, that money will soon disappear yet again, as the federal government will eventually have to start compensating for their substantial losses by raising taxes.  I am not trying to make an ideological argument here.  Common sense should tell you that the math just doesn’t add up.  The only thing that adds up here is that we are getting close to election season, Obama is counting on the youth base he had in ’08, so he’s trying to sweeten the deal for us, the millennial entitlement generation.  So, am I right or am I wrong?  You let me know, but in the mean time, I’m going to go study, because  I need to get a job after I graduate so I can pay off my grad school loans, not you.

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