Government, the New Debtors' Prison (Douglas French)
Tuesday December 18th, 2012
An old banking buddy of mine has been out of work for a full year. I met up with him yesterday, and he told me the good news that he has finally found work. It's not enjoyable. But it pays better than sitting at home.
His time of unemployment had been doubly tough because his son was also out of work at the same time. The proud father seemed happier that his son had also found a job.
"And since he works for a nonprofit, they will pay his student loan," he said.
"What?" I said, not sure that I was hearing right.
"If you go to work for the government or a nonprofit, they will pay your student loan."
I told my friend that I'm thrilled for him and his son, but that I'm stunned that these sorts of incentives are in place to drive debt-laden college graduates to government and nonprofit jobs.
After all, this means taxpayers are footing the bill for these loans, on top of paying for government salaries that are, of course, a dead weight on private enterprise.
Well, it didn't take much digging to find the Public Service Loan Forgiveness Program (PSLF) that was passed by Congress in 2007. According to Forbes, "The program promises to absolve remaining balances on the federal student loans of qualifying borrowers who make 120 monthly loan payments under eligible plans."
To be eligible, you must make these payments while working for the government or a 501(c)(3) nonprofit. The way to maximize the government forgiveness is to sign up for the Income-Based Repayment (IBR) Plan or the Income-Contingent Repayment (ICR) Plan.
So say a theoretical student graduates from law school (to use an example provided by Forbes) with $120,000 in debt and takes a job as a public defender making $45,000 a year with a 3% annual raise.
According to Isaac Bowers, senior program manager for educational debt relief and outreach at Equal Justice Works, a Washington, D.C., nonprofit, that person would be eligible for roughly $151,000 in forgiveness if the young lawyer enrolled in the government's Income-Based Repayment Plan and repaid about $48,570 in 120 payments.
There is a complete alphabet soup of debt forgiveness programs for those working on the government payroll. Various states have their own programs, as do cities, universities, and so on. Of course, these programs are all subject to funding, so hooking up with a federal government job offering a debt forgiveness program is the safest way to go.
Mark Kantrowitz tells Forbes that loan forgiveness options at the federal level are the most reliable. "Even if they get canceled, existing borrowers are likely to get grandfathered in," he said. "And they're not in danger of being canceled. There would be too much of an uproar if they were."
Meanwhile, MBA graduates gainfully employed in the private sector whipping up lattes and the like are struggling to make payments. This past quarter, 11% of student loans were 90-plus days delinquent, which "for the first time exceeds the 'serious delinquency' rate for credit card debt," William Bennett writes for CNN.com.
Students are graduating with mountains of debt and moving back in with their parents when they can't find a job, or at least one that provides enough to pay rent and student loan payments. This isn't some isolated circumstance. One in five families is shouldering student loans debt, according to Pew Research Center. But for households headed by someone younger than 35, the percentage is a whopping 40%. Back in 1989, that number was less than 20%.
Over a quarter of households headed by someone aged 35-44 has student debt, more than double the 11% for this age group in 1989. The average amount of student debt per household has nearly tripled (in adjusted dollars) in the same time frame, rising from $9,634 in 1989 to $26,682 in 2010. The result?
Mr. Bennett makes the very salient point that student loans are risky, and the government, which makes 93% of student loans, is an irrational lender. Someone pursuing a degree in anthropology can borrow just as much and at the same rate as a student earning a marketable degree like say, nursing.
But the government keeps on shoveling out the money. After all, Obama once told Congress,
"Tonight, I ask every American to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma." To that end, the Department of Education handed out $133 billion in 2010 and another $157 billion in 2011. And still students are borrowing like never before. But for what? The Associated Press reported earlier this year,
"About 1.5 million, or 53.6%, of bachelorís degree holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41%, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields." My friend went on to tell me that his daughter is nearly done with graduate school. I asked if he had been shouldering the burden of her education costs.
"No. Student loans."
I asked if she had racked up a six-figure loan balance.
I let out a groan. He quickly added, "but she'll probably work for the government."
The mortgage debt crisis has been replaced in the public view by the student loan debt crisis. Total student debt outstanding is approaching $1 trillion. And while students are graduating with fancy degrees, jobs that pay enough to service the debt are few and far between.
The taxpayer just can't escape funding the higher education racket. Your state taxes provide direct support. Your federal taxes are funding direct aid and student loans. And now graduates have a compelling reason to find a place on the government payroll with you footing the bill. After all, student loan balances can't be discharged through bankruptcy, but they can be through government employment.
Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.