The Debt Ceiling Bill Leaves Grad/Professional Borrowers No Worse Off

…Unless they’re ineligible for Income-Based Repayment (IBR).

I apologize to readers for not doodling more often. Been busier is all.

I’m not saying we should cheer it—I think the government shouldn’t play lender at all—but there are a few reasons to shrug our shoulders rather than explode with rage at the Budget Control Act of 2011 (BCA). First, here’s what the law does specifically.

The relevant text is at the bottom, §§ 501-504.

(1)  § 501 modifies 20 U.S.C. § 1070a(b)(7)(A)(iv), which as my best research shows, does not exist. 20 U.S.C. §1070a(b)(8)(A) does, and I’m guessing the law was meant to increase the Pell amounts listed. [UPDATE: Here’s the statute that changed the paragraphs.]

(2)  § 502 adds a third subparagraph to 20 U.S.C. § 1087e(a). It allows graduate and professional students to borrow the equivalent amount of Subsidized Stafford Direct Loans for which they were already eligible as Unsubsidized Stafford Direct Loans starting July 1, 2012.

(3)  § 503 alters 20 U.S.C. § 1087e(b)(8) by taking away the Secretary of Education’s power to create payment incentives for loans created after July 1, 2012.

(4)  § 504 excepts the BCA from the “Negotiated Rulemaking” requirements and “Master Calendar Exception,” which have to do with the BCA’s implementation, not its substance.

As to the Pell (7) vs. (8) typo, I don’t know if I’m missing a more recent version of the law that repealed one of subsections (1)-(7), but if not, whoops on Congress and sorry Pell recipients. There may be an administrative procedure that allows the intended law to be modified, particularly because the statute it cites doesn’t exist, leaving a patent error. Nevertheless, there are two things that the BCA doesn’t do:

(1)  Grad PLUS loans are intact (20 U.S.C. § 1078-2). These allow grad students and professional students to finance total cost of attendance (including living expenses) after whatever (now) Unsubsidized Direct Loans can get them. This means no one will be forced to take on private loans who didn’t have to already.

(2)  More importantly, IBR is untouched (20 U.S.C. § 1078-3, § 1087e(d)(1)(E), §1087e(m), and § 1098e). Even though interest will be capitalized on professionals’ and graduates’ Direct Loans while they’re still in school (Managing Partner calculates it at $3,628 by graduation for law students), they can still elect the IBR plan and have their loans forgiven after 25 years. Although, for those who are ineligible, the BCA makes them worse off with higher interest loans.

Congress may think it’s saving money, but it’s not. The net result is that ED is going to be canceling even larger amounts of graduate and professional student debt 25 years after everyone graduates. I’m more concerned that Congress picked out this one piece of discretionary spending out of the entire budget for austerity in the debt ceiling hostage-situation. Changing the law accomplishes nothing ($21.6 billion in savings is nothing to the federal government over ten years, and coupled with the additional Pell spending it saves only $4.6 billion by 2021), and thankfully Congress isn’t bright enough to know about IBR and PLUS loans. Logically, if many of the loans will never be paid back in full anyway, then lending more money today with more capitalized interest is just wishful thinking. Hopefully future battles over student debt won’t get any worse than this.

8 comments

  1. Why does everyone think IBR is a panacea? It’s a recipe for default in my opinion based on the fact you have to re-qualify each year. No assurance it continues and no contractual or legal right to remain on it equals more trouble. Not to mention the forgiven amount is taxed as income. I’d rather they got rid of it so a real debtor’s revolt could happen. As it stands IBR really only benefits the parasitic lenders and schools by allowing students to avoid default passed the two years they are calculated.

  2. PLUS and Grad PLUS are huge money-makers for the taxpayer — negative subsidy rates.

    Stuff that is forgiven in 25 years is a tiny, tiny cost, if at all, because of the time value of money. It is actually more than 25 years. First you get loans, then you enter repayment after a six-month respite following graduation or dropping out. Entering repayment could be five or six years after getting the loan. So the write-off on the freshman year loan could be 31 years down the line. If your income went up, wouldn’t you want to pay off the debt slightly faster with the annual requalification adjustment? Or would you say there is a contractual right to the first calculation that was ever made upon choosing the repayment plan?

    There is no way that Congress would repeal IBR for old borrowers. They might decide at a certain point to allow no additional borrowers to enter the plan, though — despite the fact it is a moneymaker. Americans generally don’t like stuff to be based on income. Australia is the way to go — all loans must be repaid under IBR, and the system is mildly progressive. Collections are through the tax system, so there is no extra billing process.

    How would you know what your payment was unless you had to “requalify” each year? If your income went down would you want to “avoid the paperwork”? And family size is part of the calculation, so, if you had a baby, you would want to fill out new paperwork. ICR is even worse in that, in addition to income requalification, you need to fill out the IRS consent form each year — a feature put in by banking lobbyists who were anti-direct-lending (ICR is only available in Direct Loan, because the IRS will not allow private companies to interface with our nation’s extremely-sensitive taxpayer information databases).

    While there is a lifetime maximum of capitalization at 10% in the ICR plan, it is still a moneymaker, and IBR similarly, despite the first three years of blank checks to lenders for unaudited interest reimbursements.

  3. Exactly– IBR sounds good, but I strongly suspect that most of the people who attempt it will somehow get disqualified by making too much money.

    Kind of like how it was “great” to be able to deduct your student loan interest when you were making less than $60,000, but the reality of making that little while paying your loans meant there still wasn’t any money left after paying taxes, loans, and rent.

    The cruel kicker with IBR, however, is that people who earn their way out of the program (may through inflation adjusted wages), will then get hit with all that compound interest.

    1. People on IBR will have to pay more interest in the long run, but as the ED website says there is a ceiling to monthly payments: “[Y]our required monthly payment amount will never be more than what you would be required to pay under a 10-year standard repayment plan.”

      1. 100000 dollars contingent on vague ED website rule with no bearing on reality

        Yay neofeudalism!

  4. Thanks for the shout-out! Also, your research is great!

    Like some other commenters, I also have concerns with the IBR scheme. Whether or not they get rid of it entirely, it seems like it would be easy for Congress to change the terms – up the percentage of income or lengthen the time term. Unfortunately, I think that the existence of IBR distorts the basic financial reality of the situation and creates a moral hazard where young people seem more comfortable putting themselves in 200K worth of debt because they believe that the IBR will prevent the situation from getting too bad.

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