Student Loans: The Continuing Crisis That Is Getting Worse
"As managed, this system cannot continue as a loan program. It will not end well."
By Kevin Van Elswyk, Mises Institute
The leviathan does not rest in pursuing free universities, creeping ahead unchecked by either reason, law, or accounting principles. Why is student assessment of their federal-debt-financed degrees so low? Why are 26 percent of past payments delinquent? More than 50 percent of students agree that they either studied the wrong major or wasted time and money. Less than half have found work in their major field of study.
Public dialogue is lured into discussing forgiveness amounts, rationalizations, plans, and terms, without specifics about monthly costs or other options, thereby distracted from asking the following question: How have graduates—assertively promised increased income, personal satisfaction, and positive impact on society—now become a new dependent class?
The Department of Education gave up collecting student loans. There is an ontological divide. An absence of cost-control measures in discussions of student debt is proof of this divide. The state views individuals as dependent clients in a social-welfare-type scheme, not bound to the repayment terms of a financial contract.
Behind the scenes, the Department of Education plays mix and match with legislated plans, discontinuing some and combining others for maximum charity. The most recent and grandest attempt is the proposed “Savers Plan” (Save Repayment Plan). What are the real costs of payment plans that calculate debt forgiveness after ten years of payments, subject to discretionary income?
No one knows! The Congressional Budget Office cannot use static forecasting. Initially, there were three loan payment plans, expected to be paid in full. Standard repayment and graduated repayment were calculated on the loan balance within a ten-year term. The latter was modified out to twenty-five years and labeled the extended repayment plan.
The federal government’s interjection into debt financing came with the income-contingent repayment plan, passed in the 1993 Student Loan Reform Act signed by then-president Bill Clinton. To make college more affordable, this brought all loans under government authority. In 1993, student loan debt was $180 billion. Average postsecondary public college debt in that year was $3,200. Forty-nine percent of 1992–93 graduates borrowed money to complete college. The average debt for these graduates was less than $10,000. The Student Loan Reform Act set payments at 20 percent of discretionary income. After twenty-five years of eligible payments, any outstanding amounts would be forgiven. This was the first clue that the plans were being designed for partial payments on all student loans.
The slide to free university accelerated in 2007 with income-based repayment. Monthly payments were calculated on what a student could pay, not what was owed, resetting income-contingent repayment plan payments from 20 percent of income to either 10 percent or 15 percent of discretionary income. A debtor’s annual wages less state poverty wages is termed discretionary income.
Successive legislation again changed payoff terms that were using 1.5 poverty wages to calculate a reduced discretionary income. The proposed plan calls for up to 225 percent of poverty wages to be deducted from gross wages. Continually dropping the payment percentage on decreasing calculations of disposable income and adding shorter terms makes it impossible to estimate how much of a loan balance will be written off.
Loan payments are an expected contractual income flow for the United States Treasury. Suspended student loan payments are delayed Treasury payments. Writing off a loan balance after ten years of increasingly lower payments confounds the underlying promise of higher income, the student loan rationale spoken across the education landscape.
The administration’s ultimate goal of forgiving student debt was revealed in the Student Loan Forgiveness Act of 2012, which never came to a vote. Included in this proposal were graduate student loans. A cap of $45,520 was applied to the sum of ten years monthly payments (120 monthly payments of $389 extinguished the loan balance regardless of size). After ten years, any unpaid balances were forgiven. This plan effectively guaranteed that graduate-level debt will never be paid off. This irresponsible idea lives on under the Savers Plan. There are three benefactors of this financial malfeasance.
Students cloaked in baccalaureate hubris label critics as uneducated and irrelevant. Some view their major course of study as a no-fault do-over. To accept the administration’s grift, they claim a lack of knowledge or understanding of basic accounting and loan contract terms, seeking for their private individual errors to be paid for by the larger society.
The educational industrial complex has the leviathan as a de facto business partner. Slow and resistant to adaptation, many schools struggle and need increasing public assistance. One-half of student debt is owed by graduate students. Undergraduate loans are limited to $31,000, while graduate loans are unlimited for the 25 percent of student loan borrowers holding them.
A hidden and perhaps prime mover of current proposals is the Department of Education’s past and present avoidance of responsibility. The administration’s persistence in forgiving student loans hides derelict indifference. Curated facts such as loan figures, including due as well as pending amounts, are presented to the public to sensationalize the topic, promoting a rush to judgment.
Precovid (when student debt was $1.4 trillion) and prior to the Trump-Biden suspension, 32 percent of loans were already in a limbo of default, deferment, or forbearance. Without a bank-audit-level review of FAFSA plans, tuition costs will continue to drift upward; past administrative abuses will be kept hidden. A quick solution to the loan program is meant to cover the incompetence from prior administrations’ failures and the extralegal plans we have today. The dream of free university and graduate school, once hoped for in 2012, comes closer to reality.
Student debt relief is political catnip to Washington. Without any congressional hearings or enabling legislation, the White House has announced the SAVE Repayment Plan to lower monthly loan payments. The discretionary income calculation subtracts 225 percent of the poverty wages from income. No payments are due this year if your salary is less than 225 percent of poverty wages. Loan balances may be forgiven after 120 payment cycles. Undergraduate repayment rates are 5 percent, and past interest is forgiven. This new plan specifically addresses larger portfolios of student debt. Clearly, the intent of the original suggestion of a $50,000 write-off was for graduate degrees.
New Ending
How badly are students financially impaired? Taking a 2023 student debt maximum of $31,900 into the pre-1993 payment scheme of a twenty-year payoff at 5 percent interest requires a payment of $217 monthly, or fifty dollars weekly.
In May 2022, Treasury secretary Janet Yellen said, “Student debt is a substantial burden to many people, especially those who end up with low incomes.” Surely a bachelor’s or associate degree can create additional income to cover the cost of repayment without impoverishing students. As managed, this system cannot continue as a loan program. It will not end well.
Author:
Kevin Van Elswyk is a 10-year adjunct associate professor most recently with University of Maryland’s Global Campus. He lives in Brookfield Wisconsin and happily has time to read, tie flies, think, and write.
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I'm a physician (internist and nephrologist). I have been practicing medicine for almost 20 years now (in Europe mostly). Here's what I have been thinking about lately. If you read the Medscape Survey for physicians' compensations for the US, you can draw some interesting consequences:
https://www.webmd.com/corporate/press/20230413/medscapephysicians-compensationreport
The average physician had a salary of 262k in the US in 2023. It looks like a nice sum of money, however, you get a completely different picture if you consider the details.
1. medical school is 3 years of college and 5 years of medschool in the US. So if you are lucky and start at 18, you finish at 26.
2. The average collage graduate from med schools has a debt of 200k when they start their career: https://www.forbes.com/advisor/student-loans/average-medical-school-debt/
3. Then you have residency. Residency in the US means you work 100 hour work weeks and earn 30k a year for 6-8 years. So this adds another 8 years to you basically losing money, which means you start actually earning anything at the age of 34.
4. So you are 34, most likely your 200k student loan is now MUCH more because of high rates (6-14% right now) AND you have been working your ass off for 16 years (8 years of the hardest universities then 100 hour work weeks for another 8 years with next to no pay), you have no sex life, no private life, you are either never married or already divorced (this is my case, actually). Now you start making money. You make 262k. Except this is before taxes. Since most states in the US have a progressive taxation system, and you are a high earner, most likely you lose at least half of this to federal, state and local taxes, insurance fees, legal fees, board membership fees, training costs, etc. Let's say you keep 130k. That is a little over 10 k a month.
5. However, you still most likely have your student loan debt, which most likely increased VASTLY since you left med school, since you were making 30k a year for 8 years AND rates are now 6-14%. If rates remain this high, I don't think its an exaggeration to suggest that your average trained doctor after finishing residency will look at a 500k debt pile by the time they start working as a trained doctor. I mean, at 10%, a 200k debt is increases by 20k in the first year, 22k in the second, and so forth, after 8 years, with a geometrical sequence you are looking at 389k on your student loan alone, supposing you didn't take out a loan for something else, like getting a car, helping with your living expenses, medical training fees, etc. etc. You obviously have to start paying this back. If you want to pay back 500k over a 10-year period, given that only your rates on this are about 10%, you will have to contribute AT LEAST 100k a year to pay it back in 10 years. So you pay 50k on the 10% rate and another 50k to decrease the principal, now you paid it back in 10 years. Well, also you only have something like 30k left to live on, but hey, you are now used to this lifestyle from your 8-year residency, so Status idem, as we say in Latin.
6. Hooray, you are now out of debt in 10 years. You are 44, still no sex life, still no private life, no wife, no kids, but now you get to keep your whole 10k salary a month for yourself. Except you are burnt out, haven't had a partner in 20 years, biologically you are 60-70 years old because of the 26 years of non-stop work and struggle, you don't have a house, you don't have a car. Good luck starting your life!
Is anyone wondering why we see reports like this?
https://www.prnewswire.com/news-releases/medscape-physician-burnout-and-depression-report-burnout-worsening-depression-increasing-301732504.html
You see everyone I ever talked to kept telling me if I want to make it big, I should go to the USA. Well, given the consequences from the above calculation, I think I'll stick to my locum business in Switzerland.
If I were a US citizen, I would DEFINITELY expect my medical bills to rise STEEPLY in the near future...
Student lending reform idea: all institutions accepting third party payers post the % of graduates that are able to fund their loans with work relevant to their degree and that % can be used as a major selling point to potential students. Then they, the university, gets transferred the loan from the taxpayer at face value for any discrepancy beneath their claimed %. So if they say that 60% of their nurses get nursing jobs that can be used to service their debt but only 50% of a class gets hired as nurses, then the government or third party payer can take the loan off their book and transfer it to the (often richly endowed) school.