Angry Future Expat Discusses IBR

at his own blog in response to a comment to his guest post from yesterday that accused us of fear mongering:

Everyone is conveniently forgetting about IBR, which caps the students payments at 10% of their income. (or 15% of their "disposable" income, which is usually roughly the same).

Nobody will be starving or homeless because they are paying all their income to loan repayments.

In addition, although loan balances cannot be discharged in bankruptcy, they will be forgiven in 20 or 25 years, or even 10 if your work qualifies.

People going into higher ed nowadays have nothing to worry about on the loan repayment front. Absolutely nothing.

Stop the fear mongering. If you want to counter any IBR arguments, please do so. I personally think that there is indeed an oversupply of PhDs, MBAs, JDs, etc. But they will not be screwed over because of loan repayments. It'll be a grand waste of their time and all, but loan repayments are not an issue anymore. Aside from the possibility that Republicans take over and reverse IBR, I dont see any problems with taking out 100k in federal loans to fund school. At least not for the student himself. For the govt, well, that's another story.

AFEP's response :

Hmmm…where to begin…Let’s start here:

Income-based repayment is only available for federal student loans, such as the Stafford, Grad PLUS and consolidation loans. It is not available for Parent PLUS loans or for consolidation loans that include Parent PLUS loans. (IBR is not available for Perkins loans, but it is available for consolidation loans that include Perkins loans.) It is also not available for private student loans.

These programs are designed, kind of, to help the “average” graduate. But the “average” graduate only rarely needs help. The average graduate comes out of college with 23k in student loan debt, and the average graduate does not have parents on the hook for student loans. But there are plenty of students and graduates – usually grad students from middle class families – that cannot pay their tuition and living expenses without private loans. Here’s one:

When Michelle Bisutti, a 41-year-old family practitioner in Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000.

****

But as tuitions rise, many people are borrowing heavily to pay their bills. Some no doubt view it as “good debt,” because an education can lead to a higher salary. But in practice, student loans are one of the most toxic debts, requiring extreme consumer caution and, as Dr. Bisutti learned, responsibility.

But the biggest kick to nuts with the IBR program is this (.pdf):

Only non-defaulted federal loans made through the FFEL Program or the Direct Loan Program (excluding PLUS loans made to parent borrowers or consolidation loans that repaid parent PLUS loans) are used to determine eligibility for IBR and only those types of federal loans may be repaid under IBR. [January 5, 2010]

I would bet my left pinky toe that the vast majority of student loan borrowers who might benefit from IBR, or its predecessor programs ICR and ISR, only look into these programs after they’ve defaulted. And that’s the real point isn’t it – it helps to minimize the cost of the program.

What’s needed is a program that helps, not only in the most average case, but also the slightly abnormal case – the Michelle Bisutti’s of the world. But IBR isn’t designed to work in such situations. The reality is that for many students, student loans are their first real experience with debt – real mortgage-sized debt where the payments have an effect on your lifestyle. For the most part, they simply don’t know what they’re getting in to, and have no illusions about the student loan paperwork - This. shit. is. complicated.

But IBR is also complicated, and not just a little. It’s a clusterfuck of of restrictions and eligibility requirements. If you’ve consolidated your and your parents’ loans, you’re screwed. If you’ve signed up for IBR, but want to do the faster public service repayment, you’re screwed. If you paid on a private loan but let a Direct loan go into default, your screwed. Traps for the unwary are built into it at every turn.

Will IBR help some people? Probably. Is it some kind of panacea that will ensure that “Nobody will be starving or homeless because they are paying all their income to loan repayments?” Hardly.

AFEP has done a great job over here this week so visit his blog, bookmark it, and comment. His MBA degree and experience as a businessman makes him much more knowledgeable on these issues as well as finance and the economy than myself or most people with a JD who know squat about anything dealing with numbers.