Mar 14, 2009

Twenty Somethings in the News: Eliot Spitzer proposes a new way of paying back student loans.

Loan Ranger: The way Americans pay for college is a mess. Here's how to fix it.
"Marketed under the decidedly unappealing name of "income-contingent loans"—how about we call them "smart loans" instead?—the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student's salary jumped to $100,000, payments would jump accordingly and move up over time as income increases. After 20 years, assuming ordinary income increase, the loan would be paid off."

As a person who has around $30K in student loans waiting to be paid off, I have to admit I'm interested in any proposals that would make paying down student loan debt easier. At the same time, I'm kind of a contrarian and because I take issue with just about everything, I take issue with some parts of this proposal as well.

For one, I don't know if you've ever made $25K/yr., but I have and I don't think $243/mo. is a "feasible" monthly payment. I think Spitzer's argument that it is comes in part from the fact that, well, he's probably never made $25K/yr. so he has no idea how quickly $1500/mo. goes when you live in a city where rent is $500, basic utilities are around $200, groceries $200, gas $150, car insurance is as much as $250 (especially for boys who have not turned 25 and have not had their rates lowered), other insurance is around $150, and we haven't even started talking about if you have recently bought a car or if you have to buy new furniture or appliances that most adults already have. But I digress. The first problem is that having a bunch of rich white guys deciding what they think is "feasible" for people living on an income they've never lived on is probably going to be a bad idea for the people who have to actually live with their decision.

The other problem is that because cost of living varies from place to place, $25K in Topeka, Kansas is a very different number than $25K in Seattle or New York City. So I think that if they do set up this kind of progressive interest rate, location and cost of living should absolutely figure in to the estimation of what percentage of a given income real people can pay.

And while I think it's great to talk about how people with existing student loan debt can have easier payment plans, I think a better conversation to have is about making college more affordable. The average annual cost of a college education today looks something like this:
  • 4-year private institution: $37,390
  • 4-year public institution (in-state): $18,326
  • 4-year public institution (out-of-state): $29,193
  • 2-year public institution (in-state): $14,054

These aren't pretty numbers for students in college, and they're even worse for those looking to start college in the coming years when the tuition inflation rate runs at almost 6%--or twice the rate of inflation for everything else. Considering that the average American household brings in about $70K/yr., this isn't really a price tag that most families can afford, which means that most students will leave college with student loan debt. (Actually, 65.7% of students at 4-year institutions leave with student loan debt and the average amount of that debt is nearly $20K.)

Looking at these numbers it becomes very clear to me that the best way to address the issue of high student loan payments is to talk about how to make college more affordable, so we can reduce the amount of student loans that have to be taken out period. That really needs to be the direction we need to steer the conversation in the future, although for now, I am definitely willing to strike up talks about how to reduce my own student loan payments, because at $300/mo., that's pretty much every penny of spare cash I have that isn't going toward necessities.

But I've gone on enough. What do you think of this proposal? Do you have a better idea you'd like to put forward?


  1. I didn't do my homework well and so I apologize if I appear dumb. Won't the U.S. just subsidize college education or make state universities as competitive as the Ivy League schools? I don't understand why this can't be done. I graduated from a state university in the Philippines. We were really very poor and had to struggle with school expenses BUT I didn't have to pay tuition. Zero.Nada.I still landed a well-paying job.

  2. In the U.S., public universities are partially funded by state or local governments, and some of these institutions are actually some of the best institutions in the country, particularly when you break schools down by program. Over time, though, public colleges have been increasingly funded less and less by state dollars and more and more by the students who attend them, making them more private than public. Moreover, in many places, where tuition at public institutions was once limited by the state, many states in an attempt to balance budgets (and take colleges off the state payroll) have deregulated tuition so that public universities can charge what they like.

    It would make sense if the U.S. did more to ensure that colleges were affordable, but like everything else, private interest is now a far more popular avenue for state governments to take, which has resulted in state colleges becoming expensive to the point that most tax payers in those states can't send their children to schools they are technically partially funding. It is, in short, really screwed up.

  3. I'm from Ohio, but have been living in Australia for awhile. The way they pay their loans is an affordable percentage is taken out of their income -- they never see it, they never miss it. If they make under 37 thousand a year, it is not taken out period. My family friends said that they didn't even know they had paid in full until their paychecks all of a sudden became bigger. It seems to work really well, but whether it could be translated in this country is up for debate.

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  5. It's an interesting idea, but I agree with you that over $200 per month is not feasible at $25,000. A comment above said that the percentage was taken automatically... that might be an interesting choice if it was taken out pre-tax. I'm currently paying off about $25,000 in loans. Luckily I got a well-paying job just out of school, because I do pay $200 a month, and an additional quaterly payment on a smaller loan. I did go a private university, but only because they offered a much more competitive financial aid package (my parents are NOT well off). We only had to pay a few thousand out of pocket each year, whereas I would have either paid up front or borrowed $13,000 per year to go to the University of WA.

  6. If they worked out the percentage to something reasonable, and they took it out pre-tax, I think it sounds like a great idea.