DC wants to help with your loans: What are you gonna do about it?

Last week was a big week for student loans, but I was too busy to hear much about it.  Barack Obama was doing something; Elizabeth Warren was doing something.  Being a Massachusetts resident, I am familiar with Elizabeth Warren’s student loan cause.  But I was surprised this topic came up twice.

Say what you will, I think this Wall Street Journal summary was amusing:

Student debt in the U.S. now tops $1.2 trillion, spread among 37 million borrowers, 5.4 million of whom have already defaulted. Washington took notice this week, rolling out the usual non-solutions: On Monday, President Obama expanded a federal program that allows students to repay debt based on what they earn, eventually forgiving the balance. Taxpayers pay the rest. On Wednesday, Sen. Elizabeth Warren’s idea to tax millionaires to pay for broad student-loan refinancing stalled in the Senate.

Well here is my unsolicited opinion about those plans:

Pay As You Earn

This is the program that Obama is expanding to include older borrowers who took out loans prior to 2007, which he estimates to be about 5 million potential applicants.  Problem is that only 1.6 million are enrolled now, due to poor word of mouth and loan servicer resistance.  So 5 million more might be a little optimistic.

Here’s my more fundamental problem with this plan: you reduce your payments to 10% of your discretionary income (however they figure that out), and you go along like that for 20 years until your remaining balance is forgiven.  20 years.  Since interest is piling up on the back end, it would probably never make sense to try to pay off the debt even if you are older and earning more.  You’d just be paying off mountains of interest you allowed to accrue.  So this plan turns your schooling costs into an additional 10% income tax that follows you around for the better portion of your working years.  And as depressing as that sounds, the inevitable balance of interest that is due to the Federal Government becomes the tax payers’ problem.

So let’s see: the Federal Government provides the student loans with some sort of tax-related income, and came up with a plan to allow borrowers to not pay the full amount back.  The tax payers make up the difference – but wait, didn’t the original seed money come from the tax payers?  This doesn’t seem like a good investment…

Warren Plan: Take from the “rich” to give to the poor

I give Elizabeth Warren an A+ for compassion for students, but she has this bizarre fixation on punishing the rich.  For me it is just a turn-off.  Moreover: her oversimplified logic about wealth re-distribution begs for critique.  Of course, you could do many amazing humanitarian things with the Kardashians’ fortune.  But their fortune is not up to us, is it?  Nor should it be.  This is America, where our wealth is supposed to be protected… no matter how brazenly acquired or spent.

Her plan is to lower student loan interest rates with money she found from a handy loophole that she can close in the tax law for rich tax payers.  (In engineering, looking to other peoples’ areas for cost-cutting so that you can fund something of your own is called not cool.)  What I am saying is that she probably doesn’t have the cooperation of the tax law stakeholders.  And I find it hard to believe that her team contains genius loophole-discoverers having revelations heretofore unseen on Capitol Hill.  Even if they are, getting things done in the real world doesn’t usually involve charmless headlines about uncovering other people’s errors.

But here’s my real problem with this plan: even if peoples’ loan interest rates reduced, I do not honestly believe that most people would take the opportunity to pay down faster.  No matter what interest rate you are at, you almost always have the opportunity to pay down faster than the minimum.  But most people don’t take it.

And by the way, “millionaires” aren’t the Scrooge McDucks anymore.  That would be billionaires.  A million currently is considered a modest retirement egg for a 60 year old after 35 hard years of work.  Wait a minute, Elizabeth Warren wants to take money away from retired school teachers?!

So I had to chuckle at the WSJ’s characterization of these plans as “non-solutions” because I too am left with the question: what’re you gonna do about it?  The only real cure for loans (once you have them) is to buckle down and pay them off.  I am against digging into any class of tax payer more to “help” student loan borrowers.  College is a vacation; working life is hard, and should not be bitten any more.

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