As of last December, there is another repayment option geared toward the enterprising (or not) Hacker News sort, at least those not yet flush with cash. The Pay As You Earn option [0] allows you to pay no more than 10% of your discretionary income, over a twenty-year window. The balance beyond that will be forgiven.
In most circumstances, you'll end up paying less under this plan than under other payment plans contingent on income. In fact, if you have no income while you're starting your startup, you'll owe nothing. This is pretty much always a better option than getting a forbearance or doing one of the other payment options [1, 2], at least until you realize your millions.
The qualifying criteria are really the sticking point. Please post your questions, concerns, tax advice, etc., below. None of this is straightforward, and I'm sure I have as much to learn about this as the rest of you. ...
1. Only recent borrowers qualify for this option. If you don't qualify, look into consolidating your loans through the Dept. of Education, then applying for the PAYE repayment plan on the consolidated loan.
The devil is in the details (the last bullet point on your first link):
> You may have to pay taxes on any loan amount that is forgiven after 20 years.
Roughly: the more student loan payments are reduced now, the more the borrower will pay in federal income taxes later.
The unpaid portion of the loans will be accumulating at least some interest until forgiven. Forgiveness of that remaining balance would (under today's law) trigger a significant tax event for the borrower.
I'm trying to learn more about this but am feeling overwhelmed. Is there a professional I could contact to help me? I went to the website suggested in the info sheet on PAYE to find out who "services" my student loans and it's a company I've never heard of.
The reason for this problem is so transparent it's laughable: easy access to borrowed money naturally creates inflation in the target market until heavy borrowing becomes the norm. It happens again and again throughout history.
The only way to be truly on the risk-free side of this one though is to own a school.
As a principle, I would downsize or mortgage my house before I'd send my children into the world as debt slaves. For their part, there are plenty of state-funded schools where tuition is 10K/yr or less.
The whole thing is backwards: these lenders and schools are businesses and should be marketing and selling you their product, not forcing you to "apply."
If foreigners have the means to pay non-resident costs to attend our public schools, then I see no problem at all selling them an education. Giving them grants in lieu of citizens is just bad practice. Lending them money is bad risk management.
Having debt isn't a bad ting, crippling debt is of course, but I graduated with over 40k in debt and it forced me learn things like prioritization and budgeting. It also gives you a sense of urgency about finishing school.
Most parents aren't saving enough for their own retirement as it is. They should NOT be going further into debt for their kid's college. The kids can get loans for school, the parents can't get loans for retirement.
Parents should save as much as they reasonably can to help kids through college, but the child needs to shoulder some of the burden as well.
I see your point. Students having some 'skin in the game' is very valuable.
I find the rules surrounding the debt far more disturbing than the average amount carried by graduates, which really only amounts to the cost of one typical family car. When you read about people falling on hard times and their debt being tripled by collection agencies with no way out because of bankruptcy laws, its hard not to view it as one more lobbyist-created situation that favors the banking industry.
> these lenders and schools are businesses and should be marketing and selling you their product
It seems the problem is that they have been able to market it too well, making large swaths of the population believe they only way to a good life is through formal post-secondary education. That put pressure on the government to institute easier access to money for education so everyone has the option to choose to have a good life.
Now, the economic fundamentals are finally starting to shine through the marketing cloud. Not only through the issues of ballooning loans, but also in the realization that not everyone can live the dream sold. It is economically impossible.
It should be self-correcting though. As the costs over returns start to pile up, people will start to shy away from education. The demand will wane, leading to a return of lower, more reasonable, prices for those who are actually interested in academics, not just a job ticket. It is just unfortunate for those who are caught in the current bubble.
"I would downsize or mortgage my house before I'd send my children into the world as debt slaves."
Absolutely. I wish there was a tactful way to tell my parents this but its largely useless after the fact.
My parents bought a huge McMansion "for the kids" with all the upper middle class trimmings and neglected to save a single dime for college. And so all four of their children will be paying off student loans for a decade or more.
> The reason for this problem is so transparent it's laughable: easy access to borrowed money naturally creates inflation in the target market until heavy borrowing becomes the norm.
If that theory is correct, college costs should be much higher than they are now. Schools should be raising the price (which should shrink the applicant pool) until they are just filling their classes.
Another problem with that theory is that college costs went up fairly regularly before money was easily borrowed. I'm not sure that they are going up any faster in this age of easy borrowing than they were before.
The applicant pool hasn't shrunk due to costs precisely /because/ of the ease of borrowing and because of ever broadening acceptance of borrowing as a part of college life.
College cost are already much higher than they should be by historical standards. I think if you examine public university tuition rates since 1990 you'll find they have far outpaced inflation. I'd estimate 3x-5x is typical, while the purchasing power of the dollar would dictate ~1.5x over that time period. The only other areas that show comparable excess are health care, energy, and the almost purely debt-driven housing market.
90 percent is crap???
Enough already with this attitude towards humanitarian studies. Engineering, computer science, medicine and law are all valuable studies but diminishing other fields doesn't make us seem smarter.
One of the most creative and successful entrepreneurs I have met had studied Italian art history.
And did she use her Italian Art History education to become a successful entrepreneur? Conversely, would she be more successful with a different degree?
Study what you like/want if you can afford to, but the reality is that you are more likely to be financially independent and successful with some majors and not others. No, humanities are not crap, but you have to use the right tool for the job. If you have a degree in English literature, yet have no aspirations of becoming a teacher, then you are holding the wrong tool. The grandparent post to me reads as "when choosing a career, some are more and some are less likely to help you get good financial health."
No, he didn't use the Italian art history. I don't think there is any education for what he did. But I think that what made him good at what he did was the same curiosity and interest in aesthetics that made him study Italian art history in the first place.
This is how the quality of education has declined in recent decades. As debt has exploded, the pressure on schools to ensure that all students get job-guaranteeing degrees has increased. The fact that so many CS majors cannot actually tell you what the P v. NP problem is about is symptomatic, just like the downsizing and closing of humanities departments.
The only real answer is to do what the Scandinavians do: pay for people to be educated.
I do not understand this mentality. The point of higher education is not to get a job. It's to develop yourself as an educated, well-rounded individual.
I would argue, however, that a 'minor' concentration should be in something practical. I was a Philosophy major and CS minor and now I work as a developer. Love it and it was absolutely the right decision.
As a non American, is US student debt repayment linked to income? Or is it a more typical type of debt that could swallow up incomes in the event of deflation?
Here in the UK, you have to earn over the equivalent of $26k per year to start paying it back and then it's 9% of your income over that. I believe it is then written off after 30 years. So the risk of a crisis in this version of the system is low since the terms are so generous.
As a recent CS grad who had around $20k of debt (and 16k of that is now paid off 9 months later) the terms are not generous. I had to take subsidized stafford loans each year just to qualify for my state grant, since it was supposed to be "needs based". My last loan is only 3.5% interest though, so I'm taking my time on it.
The other poster covers it in greater detail, but after 6 months they expect payments, and deferring them only lasts so long (and I don't know how long).
And you can't ever get rid of them.
The answer still isn't to bail everyone out. It just perpetuates the problem. If higher education is to be a for profit business (at least in many cases) you can't create artificial lending markets like student loans, it just causes the absurd bubble that has popped up in the US. It should be flat "heres the cost, go try to get a loan for it" like you would a car or house. When the government starts handing out free money no questions asked with a repayment plan, schools just pile that on top of their tuition fees as profit.
It doesn't hurt that we really should be looking to having online certifications for either free (MIT courses, etc) or extremely low cost. While the K-12 years also have a function as day care, hopefully adults don't require that cost, and stuffing them into giant brick buildings often thousands of miles away for months on end is really inefficient.
The answer is to let these loans default. That's how the lending system should work. No bailouts, but simple defaults.
You as a lender are responsible for factoring in the probability of a default. If you haven't - sucks to be you. Same goes for government loans, e.g. you create an institutionalized Banking system (like the Federal Direct Student loans).
And if you survive the coming mass default (http://www.zerohedge.com/news/2013-02-28/delinquencies-stude...) - without gov. bailouts - you'll have learned a valuable lesson on lending:
Don't give out ridiculous loans on ridiculous terms to people who can't afford them.
And rest assured that the education system will find a way to adapt - probably by making education a lot cheaper again.
A student loan default is not the same as a typical loan default: the government will start by taking whatever tax returns you get, and follow up by garnishing your wages. Fortunately, there are ways to get out of default status that can wipe your delinquencies off your credit report as long as you begin and continue to pay on time.
There would be very few people who qualify for student loans if we treated them the same as traditional loans, and virtually all of them would be the children of the wealthy or upper middle class.
IMO they should default just like typical loans. These student loans wreak havoc with the lives of those that cannot pay them back - best example are doctors that are not allowed to practice anymore because of their student loan delinquencies.
> There would be very few people who qualify for student loans if we treated them the same as traditional loans
True, but that is not the problem - the problem is that college and education costs have risen almost exponentially. This problem will certainly not be solved by pumping massive amounts of bad loans into the bank accounts of already overpaid colleges.
In addition, there is supply and demand at play. If the free handout money suddenly dried up, some schools might cut back on the 50,000 square root gyms and renovating every other building every year, but they would still need to fill their classrooms and empty seats is just wasted opportunity for them.
The prices would drop. Less people would be able to get in college, absolutely, but those people are the ones most likely to graduated with 50k+ in debt they can't fathomably pay off, especially when they get degrees outside STEM.
The only downside I see is that right now, there is a strong sense of scholarly meritocracy going into the college system because, since usually it is just trading loans for grants and scholarships, you get the peak number of people applying - if some people are locked out for financial reasons, and they can't get the scholarships to fund an entire education, they just end up never going, even if they have great potential and discipline.
But in the end, college is a rigged market, just like telecom, oil, banking, etc are right now. There is a billion dollar industry invested in keeping the status quo in check, and any changes to stafford loan policies inherently have to come from the federal level due to their nature, and those are the most easily bought politicians of them all. I don't see the situation changing any time soon for that reason.
The problem with your solution is that the majority of student loans are government insured Stafford loans and a "defaulted" loan is still paid back to the lender for full principle by the American taxpayer. Support for this solution would be miniscule.
In an aside, loans made to college kids to get a quality education is not a ridiculous loan on ridiculous terms to people who can't afford them.
I believe the American Taxpayer will have to pay for this either way, the choice is between effectively destroying the lives of those that default or giving them a fighting chance.
> "In an aside, loans made to college kids to get a quality education is not a ridiculous loan on ridiculous terms to people who can't afford them."
It doesn't hurt that (at least for me) the ONLY reason I went to college was for the degree saying CS. I had been programming for years, wrote some WoW addons, and was bored out of my mind for 3 years straight taking lectures on things I could have easily read in textbooks or even off wikipedia. But the number of job opportunities when you have BS of CS on your resume are just orders of magnitude larger.
That is colossally stupid. We need a better way to certify people for things than wasting years and tens of thousands of their dollars on this nonsense.
I basically agree with you, but these ARE loans made to people without a specific, current means to afford them.
That seems perfectly appropriate to me (and I assume to you), but this lack of being able to predict the future income stream of an individual is a large driver in making them not dischargeable, because that allows the product to exist.
Because I agree with you(r presumed position) that these are not ridiculous loans and that their availability should be encouraged, I'm strongly in support of the terms necessary to make them available.
There are very few legislation/regulation-based restrictions between the level of one's income and the repayment schedule/amount of one's student loans here in the US though it depends largely on how the education debt was financed. The vast majority of loans are made from a large commercial bank to a private citizen. The bank makes these high-risk loans because the US Federal Government "co-signs" on the loan for the student receiving the funds. In the event of an economic downturn or financial hardship, if the former student has limited income (underemployment) but can pay something, the student negotiates a payment amount with the bank. If the former-student is unemployed or has such severe economic hardship that they can pay nothing, the borrower's loan can go into what they call forbearance. Been a long time for me, but I believe you can have a total forbearance time of 36 months over the life of your loan. If, for a variety of reasons, you default on the loan, the lender can/will submit a claim to the Federal Department of Education and the lender will be compensated for the remaining amount of principle on the loan. At this point, your loan is now "owned" by the Department of Education who has substantially more latitude to get their money out of you than a commercial lender does (they can garnish your wages through your employer and keep annual income tax over-payments). But, getting back to your question, there are no established laws that dictate a lender can extract more from you than you can reasonably pay depending on your circumstances. Lender's are incentivized to work with you for 2 reasons, 1) the loan is guaranteed by the Federal Government so they will not lose a dime of principle 2) the longer you carry the debt, the more money the lender can make from interest.
Note: Congress did pass a law that stipulates that student loan debt cannot ever be included in a personal bankruptcy. The loan, theoretically, can and will follow you for as long as you live until you pay it off.
Excellent question. I hope someone with more knowledge vis a vis the US student loan system chimes in, but I'll add where I can.
To begin with, in the US, it's important to distinguish federal loans from those issued by the private sector. The former are issued by the government, the latter by private institutions (banks, et al).
Federal loans : The IBR (income based repayment) plan was recently introduced [1]. It appears similar to the UK plan, except the implementation details are different (15% of income over 25 years). There are of course eligibility requirements that (shock of shocks) are not always crystal clear [4]
Private loans : nothing whatsoever AFAIK, nor much planned future legislation
Lastly, it's important to note that both public and private US student loans are notoriously difficult to have discharged, including in the event of bankruptcy. The bar is set high enough to almost be considered de-facto impossible [5] (opinion).
This, IMO, makes the astronomically high figure presented here all the more alarming. An affordable education is possible in this country, but we haven't been good at educating the public in this regard (ironically, I guess).
For a general breakdown on the differences between federal & private loans, see the linked chart [6]. While I guess I should have known this already, I was surprised to note that some privately issued loans come bundled with pre-payment penalties.
The easy fix would be to make non-governmental student loans the same as every other class of loan: able to be discharged in bankruptcy. This would really cut back on the market, but probably not eliminate it.
I'm afraid you are wrong. What you are talking about is doing anything to keep the debts on the book, passing the cost to the people -- the very people who are indebted. That's what the global crisis comes down to: a refusal to allow bankruptcy, on every level -- personal, corporational and national.
If normal people were in fact getting bailouts they would be getting their mortgages paid off whereas the Fed is just making the paper value of the assets based of those mortgages higher than their probable market value.
Here in Australia, the Federal Government will cover the costs of your Tertiary Education (namely, Uni fees) under a scheme known as 'Commonwealth Supported Places' for most Tertiary Education places that have applied to be a part of it.
Universities usually charge in the neighbourhood of $800-1900 per subject, however many students simply put on HELP/HECS debt (and will pay it back later. Much later.)
You pay it back before when you start earning above a certain threshold, you must start paying it back, along with tax. Currently, that threshold is $44K per year and above. Similar to the UK, you pay a base rate + the consumer price index (read: inflation) for that financial year. There is NO interest rate (as such) whatsoever.
As part of the tax system, you have to declare to your employer that you have CSP/HELP/HECS debt and they usually take this into account when its payday.
You are then paid your gross amount -tax -CSP/HELP/HECS debt.
There are plenty of people who can take north of 20-25 years to pay off a full, 3-year degree of their choice.
This could start some reverse brain-drain. Get education at a top flight university in the US, rack up student debt like there is no tomorrow. Then leave the US, move to another continent and use your prestigious title to out-compete the locals while you leave your debt unpaid. Highly unethical (well, maybe not so highly, student debt is a pretty questionable concept to begin with), but definitely not more so than those that study in poorer countries which they leave behind the moment they have a title giving them access to employment abroad.
Unlikely. If someone can easily find a high paying job overseas with their education they can do the same in the US, debt problem solved.
One of the biggest problems is that student debt is so easy to acquire. It makes it easier for people to complete college who aren't as serious about it and who don't have a firm notion of how they will make money afterward. It also makes it easier for colleges to raise tuition (as they've done). Classic bubble behavior.
The real problem is that the low quality of K-12 education has forced a lot of employers to require college degrees as a prerequisite, not because the job is dependent on the specifics of the degree but because it's the easiest way to ensure literacy and so forth.
If employers are just using a college degree as a signaling mechanism for basic skills, they should just ask for high school GPA and SAT score. Those are the primary criteria colleges use for admissions.
I expect there are considerably more people who fit the necessary criteria to attend college than who end up as graduates. When you are trying to filter applicants, you usually want to reduce your set, not increase it. Even filtering on college graduates is starting to be less effective due to increasing rates of output from the colleges. In the technology field in particular, we've started to become more interested in hobbies because fewer people have relevant hobbies than degrees.
High-paying is relative to the local standard of living. Dropping a bunch of dollar-denominated debt means you can live like a king in Costa Rica or inland China or wherever.
How is intentionally defaulting on loans (i.e., basically stealing money) possibly less unethical than buying services in a place where they're cheaper?
This is absolutely brutal... given that many Americans I know have come out after 4 years (NB: it's standard 3 here in UK) with a degree in God–knows–what, with no idea what to do or where to go, and have ended up effectively retraining as soon as they start their first (often degree–unrelated) job.
This may not apply for e.g. doctors, lawyers, and such – but I'm convinced a University–grade education can be had for far less (though a large investment still required) outside of the for–profit institutions.
I'm just waiting for someone to come along and prove it... and for society to accept it (which would close the pay gap).
Most degrees in the U.S. are earned at public universities and colleges. Those are not for profit institutions.
From the pdf, a majority of borrowers owe less than $25,000. Less than 15% of borrowers owe more than $50,000. I'm sure that the larger debts skew towards younger people that have not made very many payments, but those numbers hardly paint the picture of a crisis. There's "only" about 6 million people with enormous debts.
If you throw private debt and public spending in together, does the US have more debt due to education than other western countries? (eg. in Britain the state largely subsidises higher education but then you pay taxes or your government borrows to cover the cost)
It's unfortunate that the Atlantic post uses the term "Indebted Students" for their chart, the data clearly covers all holders of student loan debt (many of whom will be happy to identify themselves as former students).
In most circumstances, you'll end up paying less under this plan than under other payment plans contingent on income. In fact, if you have no income while you're starting your startup, you'll owe nothing. This is pretty much always a better option than getting a forbearance or doing one of the other payment options [1, 2], at least until you realize your millions.
The qualifying criteria are really the sticking point. Please post your questions, concerns, tax advice, etc., below. None of this is straightforward, and I'm sure I have as much to learn about this as the rest of you. ...
0. http://studentaid.ed.gov/repay-loans/understand/plans/pay-as...
1. Only recent borrowers qualify for this option. If you don't qualify, look into consolidating your loans through the Dept. of Education, then applying for the PAYE repayment plan on the consolidated loan.
2. The NYT has a good summary: http://www.nytimes.com/2013/01/01/opinion/relief-for-student...