This afternoon it was announced that an Executive Order has been signed establishing a 'loan forgiveness' policy in regard to gov't guaranteed student loans. This leads to the necessity of totally re-thinking the economics of a gov't guaranteed student loan financed college degree.
One provision of the new program is obviously 'loan forgiveness'. Generally speaking, the new order mandates that outstanding student loan balances will be forgiven ( i.e. deemed paid in full ) after 20 years. Specifically, student loans held by gov't employees will be forgiven after 10 years.
Another provision is a monthly payment ceiling of 10% of the graduate's actual 'disposable' income.
Putting these two together, the rough numbers might look something like this for a bachelor's degree graduate with $100,000 in student loans ...
- The 'normal' monthly payment, at today's 6.8% interest rate over a 10 year term, would be $1151 per month
- However, assuming that the graduate can only find a job paying $3,000 per month, and after subtracting $1,500 per month of 'necessary' expenses, the actual monthly payment now required would only be $150 per month.
- with a ~$1000 per month 'shortfall' in repayments, the original $100,000 loan balance would increase by roughly $1000 per month despite the $150 monthly 'capped' payments being made ... meaning that after 20 years the total outstanding student loan balance would be $244,000 ( actually even higher due to compound interest charges )
- however, this no longer matters, because after 20 years worth of $150 per month payments are made, the $244,000 ( or whatever ) remaining student loan principal will be forgiven ( actually, paid for by US taxpayers )
- in reality, the actual 'out of pocket' cost of the $100,000 education winds up being 240 months * $150 = $36,000 !!!
If that's not a good enough deal, if the graduate can land a job with a gov't agency, state college etc. such that the 10 year forgiveness period applies, actual 'out of pocket' cost of the $100,000 education winds up being 120 months * $150 = $18,000
However, there are several caveats to this equation ...
- if the graduate has higher earnings, with 'necessary' expenditures fixed at $1500 per month ( or whatever ), every additional dollar of earnings means an extra 10 cents must be paid toward student loans under the 10% 'cap' ( up to the full amount of the regular payment ). This translates into more of the student loan balance being paid down, thus fewer dollars of outstanding balance to be forgiven after 10-20 years.
- Given that the additional income is fully taxable at progressively higher tax rates, this may turn out to be a strong dis-incentive for increased earnings since one of every 2 additional pre-tax dollars earned may wind up being channeled toward both additional tax payments and toward higher student loan payments ( with the only 'paper' difference being a smaller outstanding student loan balance to be forgiven after 10-20 years, which won't actually matter at all to the graduate just to US taxpayers ).
- early discussions regarding this 'loan forgiveness' program attempted to set lifetime limits on the amount of student loan debt which will be forgiven ... with a figure being kicked around in the $54,000 per student ballpark. If this provision is enacted, it will again change the math significantly ... potentially resulting in high balance low income graduates having negative amortization based student loan payments continuing until the day they die !!!



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