Student debt is a very real crisis in America and a growing
concern in nations like the UK. When I graduated from law school in May 2013 I
had borrowed a staggering $138,943. This original principal amount paid for my
total cost of attendance, which included: tuition, fees, and housing. It should
be noted; I even had a graduate program scholarship worth several thousand
dollars that reduced the amount I had to borrow.
The intensity of a professional degree makes working during the school year very difficult. The summers are reserved for unpaid internships, which are the number one way students land jobs upon graduation. After all, the goal of this highly expensive education is to end up practicing law and making enough money to repay said debt.
The intensity of a professional degree makes working during the school year very difficult. The summers are reserved for unpaid internships, which are the number one way students land jobs upon graduation. After all, the goal of this highly expensive education is to end up practicing law and making enough money to repay said debt.
Unlike many students, I managed to graduate from my
undergrad debt free with the aid of scholarships and summer jobs and had even saved
enough to travel Europe for the summer after commencement. Additionally, I not
only earned an LL.B. degree, but also two LL.M.s, which means my total cost of attendance
on average, per year, was less than $30,000. I do not mind repaying what I
borrowed, but the hyper interest and fees the government levied seems outrageous
to say the least. Not to mention it being a super tax on poor students who
borrowed to improve their lot and their family’s lot in life. See tax
burden chart for Delta County.
Sitting two and a half years after graduation, my debt
burden has grown to $231,930.[1]
Difficulty with the bar exam and the lingering effects of the financial crisis
on the legal services industry has made finding a job in law incredibly
challenging. The tenuous realities of the economy were noted when the Federal
Open Market Committee (FOMC) opting to keep the Fed rate at 0%-0.25% - where
they have been for the seven years since the financial crisis.[2]
While it may seem insane, the interest rates on my student
loans range from 8.5% to 9.5%. Tack on fees and that is how the principal has
grown by 60% in 2.5 years! As of 8 Dec. 2015, even the bank prime loan interest
rate was 3.25%.[3] Although the Federal
Reserve has no direct role in setting the prime rate, many banks choose to set
their prime rates based partly on the target level of the federal funds
rate--the rate that banks charge each other for short-term loans--established
by the FOMC.[4]
The Fed has kept interest rates low to making capital easier
to acquire. While student interest rates are over 10-times higher than the Fed
rate, the fact that the loans are originated from a government lender has made
raising the capital to earn a degree much easier.
Unlike other loans, student loans cannot be included in a
bankruptcy. This means that if a graduate encounters a financial hardship, such
as long-term unemployment, health related hardships, or general changes in the industry
or world which effects entering the labor force, there is no recourse for
restructuring and setting aside certain obligations. It should be noted, that
law does permit setting aside some student loan obligations for permanent
disabilities which did not exist at the time of the origination of the loan.
The Fed’s goals are maximum employment and an inflation rate
of 2%.[5]
The FOMC looks to any Federal Unemployment Rate of 5% or less per annum as full
national employment. This is regardless of the Labor Force Participation Rate,
which sheds light on the discouraged workers and long-term unemployed who are
no longer filing for unemployment benefits.
Congress has created income-based debt repayment schemes to
help those who are struggling to make the minimum monthly amounts. While this
scheme has helped reduce the monthly repayment costs, the interest continues to
accrue at an alarming rate. This is harmful to the borrower, because the reason
for borrowing was because the borrower was poor. Maintaining high rates of interest
for the term of the loan means an original $138,943 loan over a 30 year period
means $281,648 will have been paid in interest. However, the repayment scheme
for those facing financial hardship is even worse, as forbearance rolls unpaid interest
into the principal. Thus, my Dec. 2015 re-adjusted student debt obligation of $231,930
will turn into $702,070 over a 30 year period, with $470,140 being additional interest.
All in all, an original principal amount of $138,943 will, over a 30 year term,
generate $751,788 in interest income for the U.S. government.
The other scheme Congress has is what is called the 10 year
plan. This plan allows for debt forgiveness to occur after 10 years of working
for the government or a non-profit entity. The policy purpose being that these
jobs pay less than the private sector and would be challenged for the debtor to
repay the burden. The other policy idea is to encourage smart, but non-wealthy
students to earn graduate and post-graduate degrees. For forgiveness to be
effective, in addition to the above, there must be 120 consecutive minimum
payments made to the Department of Education.
For example, my Department of Education minimum payment is
set at $2,760 per month. Assuming I follow the 30% Rule[6],
the economic idea that a maximum of only 30% of a person’s income should go to
rent or mortgage payments, I’d need to earn at least $4,667, presuming my rent
was near the Denver, Colorado average of $1,400 per month.[7]
This seems entirely doable, since that would be $56,000 per annum. After
subtracting $33,120 for the yearly student loan minimum repayment and $16,800
for total rents, also don’t forget taxes, which between state and federal would
be about $11,356. Add these three items up and each year you are going in red
by at least $5,276. All this assumes you are not eating, commuting, having to
buy clothes, or pay for emergencies.
The reality is that a person would need to earn over
$100,000 in their government or non-profit job for ten years to survive
financially. Even at $100,000, a borrower in my shoes would really just be
surviving, as utilities, food, heath expenses, clothing, costs of children or
dependents, insurance, etc. adds up very quickly, even if you are as frugal as
someone who survived the Great Depression.
A problem for many policy makers is what if a young person goes off to law school or med school or engineering or business school and wants to come back to a poorer, rural region to serve the legal or medical or business needs of a small community. This debt burdened professional is not working for the government or a non-profit, thus one repayment play is off the table. Yet, should these communities be entitled to professionals who would serve the needs of that region? Often debt saddled student-borrowers are forced to work in the cities, leaving a void in poor, rural areas, where incomes wouldn’t be high enough to make payments, live, and support a family.
A problem for many policy makers is what if a young person goes off to law school or med school or engineering or business school and wants to come back to a poorer, rural region to serve the legal or medical or business needs of a small community. This debt burdened professional is not working for the government or a non-profit, thus one repayment play is off the table. Yet, should these communities be entitled to professionals who would serve the needs of that region? Often debt saddled student-borrowers are forced to work in the cities, leaving a void in poor, rural areas, where incomes wouldn’t be high enough to make payments, live, and support a family.
I would like to see a plan that throws back the obligation
to the original principal amount, then ties repayment to income and the Fed
Rate. Considering the policy that student loans help smart, but poor students
achieve careers in the learned professions which in turn helps elevate families
to higher income brackets, thus leading to more tax generation. It is also a
matter of fairness not to use forbearance provisions to hike up the aggregate
repayment amount. High interest on loans is essentially a tax on poorer
students who had to borrow to attend professional schools. The interest also
punishes hard work and success by rewarding these borrowers less than their
wealthier cohort who may make less, but would have more disposable income to
spend, adding to the national GDP. Creating ways to allow for greater social
mobility is a good idea; however using these methods to punish those who seek a
better life seems highly unethical.
[1] U.S. Dept. of Education,
Loan Servicing. Navient-SallieMae Account
of Matthew Soper. 29 Nov. 2015 Print.
[6] See: http://www.bloomberg.com/bw/articles/2014-07-17/housings-30-percent-of-income-rule-is-near-useless
accessed 9 Dec. 2015.
[7] See: http://www.denverpost.com/business/ci_29013199/average-metro-denver-apartment-rent-drops-5-downtown
accessed 9 Dec. 2015.
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