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October 26, 2011

The IBR Student Loan Repayment Scheme is a Disaster

                                                     By Andrew Gillen

mixed-news-about-college-loans.jpgThe Income Based Repayment (IBR) program, which took effect in 2009, is designed to lighten the student-loan burden for some students. The basic idea is to limit monthly payments to less than 15% of disposable income. If a student makes these payments for 25 years, any remaining balance is forgiven, meaning that taxpayers essentially pay the rest off. President Obama just announced his intention to lower this to 10% of disposable income and 20 years of repayment before forgiveness. These proposed changes, as well as IBR in general, are bad for the following 6 reasons.

1. IBR treats the symptom rather than the disease.

Perhaps the most fundamental reason to end IBR is that it is treating the symptom (excessive college debt) rather than the disease (excessive college costs). IBR is essentially trying to fix the problem of students borrowing too much for college... without stopping students from borrowing too much for college. All it does is say that the government will pay for some portion of it in the distant future. To steal a line from Wolfgang Münchau (though on a different topic):

"This is the equivalent of putting explosives into a can, before kicking it down the road."

Higher college costs are the ultimate problem, and IBR does nothing to address that. Moreover, if the goal is merely to try and make college more affordable, there are much better ways...

...to accomplish that than making vague promises of what we'll do two decades from now.

2. IBR rewards current politicians while sticking future ones with the bill.

No one has any idea what IBR will cost in the future. With a typical bill, the Congressional Budget Office (CBO) estimates costs and revenues for a 10-year window, and this is the consensus/baseline estimate of what a program will cost. Since the government won't have to incur any costs (loss of revenue) from forgiving loans for 10-25 years, IBR is being treated as a free program in spite of the fact that it could end up costing billions of dollars a few decades from now. This allows current politicians to claim to be helping students, while forcing future politicians to figure out how to pay for it. Needless to say, that is not a healthy way to make policy. If current politicians want to help borrowers, they should be the ones sacrificing other priorities to do so.

 3. IBR encourages people to think they won't have to repay debt.

IBR essentially says to people, "Don't worry about how much you borrow, you won't need to repay it." This should sound familiar, as a big driver of the housing bubble was the perception that you wouldn't have to repay that risky mortgage because your house would be worth more in a few years and you could just refinance. One would think that after all of the collateral damage from the housing bubble collapse, we would not encourage people to think that their debts will disappear without having to be repaid. But one would be wrong when it comes to IBR.

4. IBR can increase total student repayments.

The standard (non-IBR) repayment plan entails paying off your loan over 10 years. By lengthening this to 20 or 25 years, it is possible that IBR could end up costing some students more over the course of their loan.

5. IBR is social engineering.

While regular people need to make payments for 25 years before loan forgiveness, borrowers who take a job in the public sector or with some non-profits have their debt forgiven after 10 years rather than 25. The message from the government is unmistakable - -we want you to get a public or non-profit job. Why does the government think it knows best where people should be employed or if such public service jobs provide more value to society than private sector ones?

6. IBR is unjust.

Suppose we have two identical students. One decides he can't afford pricey Ivy U, and attends lower-cost State U instead, graduating with modest student loans which he repays. The other borrows recklessly to attend Ivy U, enters IBR, and has his loans forgiven. The end result is that the State U graduate pays for both his and Ivy U's loans. How is this just?

Overall IBR is a terrible program. The sooner we end it the better.

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Andrew Gillen is the Research Director of the Center for College Affordability and Productivity.



Comments (14)

JakeTaylor:

"6. IBR is unjust."

For all the left talks about "fairness" and "social justice" and whatnot, you'd think they'd be more concerned about the gross injustice of this particular plan, and student loan forgiveness in general. Not only does student loan forgiveness blatantly reward poor/reckless decisions, it just as blatantly punishes responsible decision-making. I purposefully attended a lesser school, a state school, to save a ton of money and graduate without debt, working part-time throughout my time in college. I humped beer kegs to frat parties Friday and Saturday nights, watching others party their time away while I worked my butt off. I just finished grad school, going at night so that I could work full-time to again graduate without debt. But I've paid a heavy price for those two degrees, in my personal time, in aggravation, and most certainly financially. And now the government is telling me that I was a chump to pay that price. Obama and his cronies are trying to tell me that I could have just partied all that time, could have saved up all that money I spent, could have had for myself all the time I spent working while going to school.

This is the tar-and-feathers issue for me. And pitchforks. If Obama and the left want a second Tea Party summer in 2012, try to ram this nonsense through and see what happens.

Friedrich Hayek:

#1 above misses an important point. Not only does IRB not fix the problem of kids paying too much for college, it exacerbates it by relieving the students of the economic burden of their purchase! If other people (taxpayers) are picking up the tab, then what motivates the student to demand value for money? This is parallel phenomenon to the ones that have driven excessive healthcare costs and housing costs in the US market.

Diggs:

The points made are completely valid, however you leave one out. There is a dis-incentive for students to take on a degree that is worthwhile to society. If society is eventually going to pay a portion of the bill, society should have a say in what they are buying. Useless degrees that pay (and provide society) very little, like Womyns Studies, or Art History, will be those that get the most subsidized in the end, as they will lead to poor paying jobs, despite costing the same as an engineering degree at the same college. Engineers, on the other hand, will more likely get a good paying job and pay back a much larger portion of their tuition bill, while also helping the society that helped them. This is so bass-ackwards that it has to have been promoted by a socialist.

Rob in Deep Blue Country:

I agree with all of this. However,you are missing a big one here. It's not only that the cost has gone up, but also that the value - on average - has gone down. Millions of students are being graduated who have acquired very little in the way of skills that society values. This is can be attributed to the broad degradation of academic standards, the enormous amount of time diverted for inculcation of political correctness and the rise of worthless majors such as sociology, race and gender studies etc. For awhile, the gatekeeper function of higher education has masked this fact and maintained the price point of a college education in the face of the degrading value equation. Now that it stands revealed by the slack labor market - and can be seen every day in the faces of the OWS protesters - government proposes to step in to subsidize this dysfunction further. The institutions that deliver higher education are structurally misaligned with the needs of the economy and society and are in need of massive reform. IBR only postpones the reckoning. This state of affairs is reminiscent of the late Middle Ages when Europe needed scientists, engineers, managers, economists and statesmen while universities produced only theologians. Then, it was an ossified religious hierarchy that stood in the way of change, now it is the ironically self-styled "progressives" who do so.

Richard:

You left out another major problem with the program. With a limitation of 10% of disposable income over 20 years, it essentially sets a ceiling on the amount of money the average borrower has to pay back. Thus, for example, if on the average the maximum amount of repayment is $40K, then it makes no difference whether you borrow $50K or $150K, you still are only liable for $40K. So unless you get a really good job, no matter how much you borrow you still pay back the same amount. That is a great incentive for universities to keep on raising their tuition since there is no additional financial impact on the student who has to borrow money.

US Taxpayer:

Need I remind everyone here that the taxpayers fund 100% of a University education at Westpoint, Annapolis and USAFA? The expectation of the graduates is that they are repaying their debt to the US taxpayer through public service (their military service). Is it really so confusing that we should, say, subsidize the cost of education of a doctor who subsequently provides direct public service, or a teacher?

A lot of folks say that the problem is the out-of-control costs of a University education, to which I would agree. However, are you suggesting that the Federal Government should regulate the tuition at private universities? Certainly their should be salary caps put in place for faculty and staff at public universities. After all, paying a football coach $2M a year is not really a good use of my taxpayer money (or are sports somehow a better value to the taxpayer). I think all senior faculty and staff should be payed equally on a standard scale regardless of discipline. That would keep abuses like that down.

I think a big issue right now is the use of taxpayer money going into all the for-profit "Universities" that have been cropping up (here's your degree from the University of PO Box 2000!). However I think the big culprit here is not that the Federal Government has made money available to citizens to better educate themselves, it's that sheisters in the private sector have come out in a feeding frenzy, providing substandard and useless educational experiences specifically to take advantage of the largess. As a taxpayer, I think the FedGov should wholeheartedly wipe out this group of leaches that is bleeding us dry for their own benefit.

One last note...as far as useless degrees are concerned; would you put MBA on that list as well? We have a lot of those folks, more than enough. And anyway, as a business owner, I have seen that B-School does nothing to help create successful business people. How about lawyers - there's a lot of them too...not sure we need anymore for a while.

Tom:

As a recent college grad, trying my best to pay my student loans (and working hard to do so):

Points 1,2 and 4 I agree with 100%.

Point 3: I use IBR and believe me, I only WISH it made me think I didn't have pay all this back.

Point 5: If the idea is more useless federal desk jockeys in Washington D.C., I agree it is social engineering and therefore bad. I was lucky enough to land a job as a 911 Dispatcher which is technically a public service job- but one that I think we can agree, people need. (Along with nurses, firefighters, etc.) You should draw a distinction between bloated wasteful public service jobs (of which there are many) and public service jobs that provide tangible benefits to the community. I chose the latter- though I'll acknowledge there are probably plenty of people that want the former.

Point 6: How? Every college grad with student loans is going to do what they can to make payments easier on themselves. State U or Ivy U- the bigger injustice is the generational theft being visited upon my generation and explains about the push for easy student loan payoffs: the sooner we pay down our debts, the more money we have to pay for the Boomers retirement.

Moral of the Story: the sooner my generation pays off college, the more cash we have to pay into Social Security for the Baby Boomers... plus, since we're not getting Social Security when we retire, a little helping of some table scraps from the government is the least they can probably do. After all, if I have to pay for their retirement, they can help me make easier payments for college.

US Taxpayer:

As a follow up to #6:

There are a couple of salient pieces of information here:

- I would assume that there is a qualification for this loan program based on income. We're not really talking about some deadbeat wealthy person leaching off the system so they don't have to pay.

- The Ivy League v State U discussion is specious at best. The type of person that would actually be accepted/admitted at an Ivy is probably not the deadbeat personality type your worried about. As I mentioned above, I think the real issue is the abundance of little for-profit startup universities that have NO entrance requirements except for your ability to get loans and grants. Just watch a little late night cable and you can get a good view of these bottom-feeders.

I would also note that #6 assumes that the "value" of a Harvard or Yale education is equivalent to, say, Delta State University (I have nothing against State Universities). I'm not sure how well that would play at Harvard or Yale (or the US Supreme Court, whose members come exclusively from Harvard and Yale).

I can sympathize with folks aggravation level, but having grown up in poverty, and put myself through a 4-year university and repaid my loans, I still think that having the same kind of access to public money that many industries enjoy (banking, oil, construction, consulting and services) through loans, subsidies and other financial vehicles seems pretty fair to me.

Red Rocks Rockin:

"Need I remind everyone here that the taxpayers fund 100% of a University education at Westpoint, Annapolis and USAFA? Is it really so confusing that we should, say, subsidize the cost of education of a doctor who subsequently provides direct public service, or a teacher?"

But where does it end? Why do public sector jobs have more value than private sector jobs? Considering those public sector jobs don't even exist without a robust private sector, why should the government provide special repayment favors for those who aren't adding the money required to keep the system solvent?

"A lot of folks say that the problem is the out-of-control costs of a University education, to which I would agree. However, are you suggesting that the Federal Government should regulate the tuition at private universities?"

Where has anyone supported this? The two biggest reasons that the cost of college has grown at an even faster rate than the cost of healthcare the last 30 years has been due to 1) federal guarantees of loan payments; and 2) the non-dischargeable nature of student loans. This hasn't been helped by the exponential growth of administrative bureaucracies, which in turn justified further tuition increases. Remove the federal loan support and make student loan debt dischargeable in bankruptcy again, and the tuition bubble would pop instantly. It would also force colleges to reform their administrative infrastructure to focus on the classroom instead of the bureaucratic feather-nesters.

Lastly, the whole concept of what the college experience is meant for needs to be dramatically revised. These institutions are still operating under a 18th-to-19th-century paradigm that college is meant to strengthen one's intellectual abilities and serve as a closed enviornment for experimentation. However, ever since the end of the WW2, these places have become increasingly viewed as a four-year jobs-training program, where you might happen to learn some interesting things about 20th century queer theory, or Greek history, or deconstruction of Shakespeare as a side benefit to learning actual skills in whatever career field one pursues. The days where getting half of one's 120 credit hours in classes that are irrelevant to the actual degree program are going to come to a halt eventually.

DamnWalker:

US Taxpayer: Last time I looked, teachers and doctors and other non-military persons did not get involuntarily re-deployed every 2-3 years, nor risk life and limb via combat. I think there is premium on risk of death that is factored into the equation here. Additionally, students at the military academies have to be appointed and prior to appointment have to perform at an exceptionally high level in order to get the appointment, and then have to meet very demanding and exacting standards in order to stay in and complete their education. Not so true for alot of teachers and soc sci students. Further the out of control costs of higher ed are directly related to the ease of federally guaranteed loans made available on large scale beginning in the 1990's. Lastly, anyone who thinks that slushing off your ill-conceived debts --whether they be mortgage, education, credit card, etc -- onto others to foot the bill thru a "debt-forgiveness" program obviously misses the point of freedom (to succeed or fail on your own merits) and of personal accountability and responsibility. I can't give much credence to that level of foolish, short-sighted thinking. "Life aint fair, Nobody owes you nothing, Earn your own keep". Damn old Gramps was a smart man!

John:

Why would students repay the loans at all? What's the government gonna do, put you in prison?

Will it make a mark on your credit report? Who cares. As it stands now, a lender may not hold liens for medical expenses against you. Just have Obama wave a wand and declare the same thing for education liens.

It's all free, America. Don't worry about it. Your free health care and your free college education and your free mortgage payments. The government has you covered.

US Taxpayer:

Understood and appreciated. As far as the Academy is concerned, many of the graduates are NOT assigned to combat duty. However, I agree that all military members should be compensated for the duty they serve to our country. It should be noted that the present administration has been far more focused on providing for these heroes that the last administration.

In terms of risky loans...I hope your attitude extends to corporate subsidies and TARP. The "fact" that many companies have paid there TARP debt has obscured the actuality that they did so by borrowing from the Federal Reserve. Anecdotaly, it seems like the big assumption here is that no one who receives a loan will repay it. Do you simply mistrust everyone who attends college and borrows money to do that. Having worked my way through college and repaid my loans, I can say that that is a bad assumption made by biased and uninformed (reactionary) people.

I think if were going to get all on a high horse about unsecured and risky debt to the Federal Govt. I think we should be starting at the big bucks, or as they say in business, the low hanging fruit before going after the little fish.

And as for the "All Free America"...how about this... a $10B subside to an already profit earning industry? Doesn't sound like a good deal to me as a taxpayer. Let's have a little outrage over that! On a local level, how about wasteful spending on so-called redevelopment agency projects that only line a few individuals pockets.

Quite frankly, if were going to cut spending, I'm with Paul...cut everything...inluding the wasteful spending on companies like KBR, Haliburton, Blackwater and the rest. All the work they are doing at taxpayer expense is only replacing jobs that used to be held by members of our military (and at a much lower cost). Stop military adventurism and wasterful military spending on weapons we don't need.

C:

If it wasn't for IBR, myself and a lot of others would default, because we're working shitty, low-wage jobs. Do you have a solution for those of use whose lives would be permanently screwed up if we couldn't pay? You're missing the whole picture.

Walter Berkshire:

I am in complete agreement with the sentiment Mr Gillem. If this IBR welfare system is allowed to continue, there will be no wall against my class and the commoner. Completely unacceptable.

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