Flaws in the student loan repayment plan

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The federal government has an income-based repayment plan to help college graduates with student loan debt keep their repayments within manageable limits.

The problem, according to Jonathan Garber of Business Insider, is that some people who use the plan could wind up worse off than they otherwise would be.

Under the plan, borrowers could limit their payments to 10 to 20 percent of their discretionary income, and then have the whole loan forgiven after 20 to 25 years.

Although this sounds good, Garber pointed out that when the repayment is less than required to service the debt, the total debt will increase.  Will that matter if the debt is forgiven in the end?  Yes, he wrote, because the forgiven debt is taxable income.  He gave a hypothetical but reasonable example in which someone with a moderate income could have $19,000 added to his or her tax bill.

Subsidizing borrowers does not solve the real problem, which is colleges charging tuition based on what the traffic will bear.  Easing the debt burden increases the amount that the traffic will bear.

The solution, in my opinion, is for community colleges and state universities to provide free or affordable education, as they once did.  Private universities would either have to match this or to show they provide extra value.

LINKS

Problem with government offer to forgive student-loan debt by Jonathan Garber for Business Insider.

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One Response to “Flaws in the student loan repayment plan”

  1. Perette Barella Says:

    Having an economy diverse with non-college career options would also tend to limit college tuition.

    Like

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