Cushy Student Loan Repayment Plan: Will It Boost College Costs for Everyone Else?

Is a generous federal loan repayment program that Congress recently made even better going to increase the cost of college for everybody?

It’s an interesting question that’s being posed by Daniel L. Bennett, who is a research and policy analyst at the Center for College Affordability and Productivity. In a Forbes article, Bennett argues that the federal student loan repayment program, called Income-Based Repayment (IBR) plan, will increase the price that all of us pay for college tuition.

To understand what the IBR is all about, you can read the post I wrote for CBSMoneyWatch in March:

Student Debt: Getting Your Payments Down to $0

Thanks to the IBR, Americans paying off federal student loans can significantly reduce their payments if they make modest enough salaries.

Here’s an IBR example:

Let’s say someone graduates with $100,000 in federal student loan debt, but is only making $20,000 a year. If the young graduate signs up for IBR (and many student loan borrowers don’t know about it!), his or her monthly payments would only be $31. Without IBR, the payments would be $1,534.

Here’s another IBR example:

A graduate with $25,000 in student loans, which is closer to the norm, who is earning $30,000, would pay $115 rather than $383.

The IBR also forgives any remaining federal student debt for students who work in the public sector after 10 years.

IBR Downside?

So what the downside to IBR?

Bennett argues that students aren’t going to worry how much they borrow for college if they know they’ve got the IBR protection:

As you can see, IBR is a sweet deal for students, especially those wishing to pursue a public sector career. But it will likely only exacerbate the rapidly inflating tuition bubble and growing levels of student debt that are a product of the government-backed subprime student loan era.

Knowing that they have an escape route from the burdensome debt trap, students will have little incentive to be cost-conscious in choosing a college and area of study, or in monitoring the level of debt that they accumulate and considering whether they will be able to find employment that provides them with sufficient income to repay it.

I’m going to be honest. I don’t know what I think about Bennett’s argument. Colleges though seem to be perfectly capable of raising their costs for all sorts of other reasons that are too often dubious. I’d love to hear what you think.

Lynn O’Shaughnessy is the author of The College Solution and she also writes a college blog for CBSMoneyWatch. Follow her on Twitter.

, , , ,

No comments yet.

Leave a Reply