The Math of Income Driven Repayment

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NCGuy
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The Math of Income Driven Repayment

Postby NCGuy » Fri Dec 16, 2016 10:30 am

Just a thought:

I don't understand a lot of the deficit hawking around getting rid of Obama's income based repayment plans. Even if the feds "forgive" debt, they still end up collecting more than the principal in the end.

Just to get this, I ran a scenario where a person has $100,000 in student loan debt and a $75,000 income at graduation (and opts for consolidation to extend the period of the loan). Even under IBR, they'd pay it off in 177 months (they'd default to Standard almost certainly once their income reached a certain threshold however). Someone on REPAYE pays off their loan in 259 months but they end up paying $212,675.

It almost certainly seems like the government is running a scam to make money off the backs of student borrowers and the fact that Paul Ryan et al want to even touch this program seems odd. You can complain about these repayment programs benefiting higher income earners but their higher incomes also mean that they pay more over time and almost certainly have little forgiveness.

Even if you double that number and the person has $200,000 in debt. Under REPAYE, they still pay $277,845 before having $215,572 "forgiven" (isn't interest fun?). There's almost no scenario where Obama's repayments don't result in MORE revenue for the federal government.

Reading the GAO report on the "cost" of the program, it almost certainly disregards the government will almost always collect more than the principal in the end.

Am I missing something? For most people, the government gets its money back in the end, it just takes longer.

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Re: The Math of Income Driven Repayment

Postby lawlawland16 » Thu Dec 22, 2016 1:11 pm

NCGuy wrote:Just a thought:

I don't understand a lot of the deficit hawking around getting rid of Obama's income based repayment plans. Even if the feds "forgive" debt, they still end up collecting more than the principal in the end.

Just to get this, I ran a scenario where a person has $100,000 in student loan debt and a $75,000 income at graduation (and opts for consolidation to extend the period of the loan). Even under IBR, they'd pay it off in 177 months (they'd default to Standard almost certainly once their income reached a certain threshold however). Someone on REPAYE pays off their loan in 259 months but they end up paying $212,675.

It almost certainly seems like the government is running a scam to make money off the backs of student borrowers and the fact that Paul Ryan et al want to even touch this program seems odd. You can complain about these repayment programs benefiting higher income earners but their higher incomes also mean that they pay more over time and almost certainly have little forgiveness.

Even if you double that number and the person has $200,000 in debt. Under REPAYE, they still pay $277,845 before having $215,572 "forgiven" (isn't interest fun?). There's almost no scenario where Obama's repayments don't result in MORE revenue for the federal government.

Reading the GAO report on the "cost" of the program, it almost certainly disregards the government will almost always collect more than the principal in the end.

Am I missing something? For most people, the government gets its money back in the end, it just takes longer.


You may find these resources useful: https://www.studentloanplanner.com/2016/12/09/law-school-student-debt/ & https://www.studentloanplanner.com/2016/12/19/georgetown-law-school-pslf-abuse/

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A. Nony Mouse
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Re: The Math of Income Driven Repayment

Postby A. Nony Mouse » Thu Dec 22, 2016 1:32 pm

That second article is kind of silly. Georgetown is only doing what every individual who hopes to take advantage of PSLF is doing. If you're planning to get the debt forgiven through PSLF there's no point at all in paying more than you have to - that is, it's not a big, it's a feature. Pretty sure Georgetown isn't increasing tuition to cover LRAP payments, they'd just increase tuition anyway.

It's true that this isn't a really independent LRAP program like some (but not many) schools have, which isn't tied to income-based plans. But it's also more than many schools offer (my law school's LRAP is very very minimal, less than what Georgetown does).

This is apart from the fact that PSLF is conceptually different from income-based repayment generally, which is what the OP was talking about.

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Re: The Math of Income Driven Repayment

Postby Winter is Coming » Thu Dec 22, 2016 2:03 pm

A. Nony Mouse wrote:That second article is kind of silly. Georgetown is only doing what every individual who hopes to take advantage of PSLF is doing. If you're planning to get the debt forgiven through PSLF there's no point at all in paying more than you have to - that is, it's not a big, it's a feature. Pretty sure Georgetown isn't increasing tuition to cover LRAP payments, they'd just increase tuition anyway.

It's true that this isn't a really independent LRAP program like some (but not many) schools have, which isn't tied to income-based plans. But it's also more than many schools offer (my law school's LRAP is very very minimal, less than what Georgetown does).

This is apart from the fact that PSLF is conceptually different from income-based repayment generally, which is what the OP was talking about.


You're right about that, but I think GTOWN framing its program in that way is problematic from a PR standpoint. Over-Indebted law students aren't really a sympathetic group and if they really go after these programs I can see GTown's materials being Exhibit 1 in Paul Ryan's presentation of "how the program really works." A lot of people who are budget hawks are more offended by one person's motivation/articulation of using a program, than the hundreds of others it helps and a willing to destroy programs because of it (see things like BS descriptions of "welfare queens" and what that lead to with welfare reform.

Sorry to bog down on this because I know that's not what this thread is focused on, but I remember as an OL thinking that was a tone-deaf way to advertise a program that's not a guaranteed thing. It's also frustrating that a school with such large classes, virtually no endowment and serious cash flow problems to urge students to rely on a program that may not be around forever. Unlike some smaller, wealthier schools they won't be able to bail out their PI alumni if it comes down to it.

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Re: The Math of Income Driven Repayment

Postby bk1 » Thu Dec 22, 2016 5:18 pm

Those articles aren't really responsive to the OP. But I will say that there's probably a good chance that high profile cases of "abuse" (e.g., top 1% earners using it on 6 figure debt) will shape what eventually becomes of the income driven repayment programs.

Re OP's points:

  • I don't understand a lot of the deficit hawking around getting rid of Obama's income based repayment plans. Even if the feds "forgive" debt, they still end up collecting more than the principal in the end. The GAO report explicitly says this is not the case. Though I don't believe that it accounts for taxes on forgiven loan balances.
  • higher incomes also mean that they pay more over time and almost certainly have little forgiveness. Maybe, maybe not. People can do things to significantly lower their AGI (e.g., max out their 401k) that may result in them getting forgiveness after 20-25 years. There's also the fact that you assume their incomes will stay high (which, at least for law, is not necessarily the case).
  • There's almost no scenario where Obama's repayments don't result in MORE revenue for the federal government. The big criticism with your hypo is you're not adjusting for the discount rate like the GAO 's report does (GAO used NPV, iirc).
  • Am I missing something? For most people, the government gets its money back in the end, it just takes longer. And this is the big thing. Taking longer means that the government gets less money, so it's not the same (see the above point).

TLDR: the big thing is that you're not taking into account the time value of money (which GAO does). Whether the government recoups more under IDR programs than it would without them, I am not sure (note that the GAO report cites ED's assumption that the fed gov is very good at getting money back from those who default).

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Re: The Math of Income Driven Repayment

Postby studentloanplanner » Thu Dec 22, 2016 6:28 pm

bk1 wrote:Those articles aren't really responsive to the OP. But I will say that there's probably a good chance that high profile cases of "abuse" (e.g., top 1% earners using it on 6 figure debt) will shape what eventually becomes of the income driven repayment programs.

Re OP's points:

  • I don't understand a lot of the deficit hawking around getting rid of Obama's income based repayment plans. Even if the feds "forgive" debt, they still end up collecting more than the principal in the end. The GAO report explicitly says this is not the case. Though I don't believe that it accounts for taxes on forgiven loan balances.
  • higher incomes also mean that they pay more over time and almost certainly have little forgiveness. Maybe, maybe not. People can do things to significantly lower their AGI (e.g., max out their 401k) that may result in them getting forgiveness after 20-25 years. There's also the fact that you assume their incomes will stay high (which, at least for law, is not necessarily the case).
  • There's almost no scenario where Obama's repayments don't result in MORE revenue for the federal government. The big criticism with your hypo is you're not adjusting for the discount rate like the GAO 's report does (GAO used NPV, iirc).
  • Am I missing something? For most people, the government gets its money back in the end, it just takes longer. And this is the big thing. Taking longer means that the government gets less money, so it's not the same (see the above point).

TLDR: the big thing is that you're not taking into account the time value of money (which GAO does). Whether the government recoups more under IDR programs than it would without them, I am not sure (note that the GAO report cites ED's assumption that the fed gov is very good at getting money back from those who default).


Hello everybody. I found this forum from the Google Analytics for my articles above. A couple points relevant to the OP's points. Not to post an article to explain this, but for folks looking at a detailed explanation of the numbers I've run, I estimate the GAO report + the loans to be issued through the next 20 years assuming unchanged loan rules to result in a $1 trillion bill to the taxpayer. Here's that: https://www.studentloanplanner.com/2016/12/05/us-will-forgive-1-trillion-of-student-debt/

Here are a few reasons why. First income driven payment is like flood insurance. You have half the people living on the mountain and half living in the flood plain. You charge everyone the same, but the risks are hugely different. Now you allow private insurers (refinancers in this case) to come in and pick off all the good risks on the mountain, thus leaving the govt with only horrible risks in the flood plain. That's basically income driven repayment in a nutshell. All the profits the government assumes will mostly be gone because the Big Law junior associate with $230,000 in debt and $170,000 income will refinance into a 15 year fixed rate 5% loan with a private lender and will leave the government 6-8% rates. I know because I help people do this everyday with the negotiated agreements I have with lenders.

The $100,000 debt $75,000 income person will not stay on IBR if they're smart. They'll refinance and leave the system.

Another point is that 62% of americans don't have $1000 available for emergency expenses. What scenario exists where the government will get even 10% of the tax revenue owed to them when the balances are forgiven in 20-25 years? There will be mass tax defaults and settlements with the IRS. A bailout will be required instead of asking people to take home equity loans to pay their tax debt.

The NPV point is a very good one. If someone's debt to income ratio is super high, I help them optimize the govt repayment programs to max this NPV to reduce the total amount paid. I've saved 118 clients an average of $108,000 (over the life of their loans, assuming current loan rules hold) on average debts of $254,000 through REPAYE, IBR, PAYE, PSLF, and private refinancing. All of this money comes at the expense of the government and the taxpayer.

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Re: The Math of Income Driven Repayment

Postby studentloanplanner » Thu Dec 22, 2016 8:10 pm

A. Nony Mouse wrote:That second article is kind of silly. Georgetown is only doing what every individual who hopes to take advantage of PSLF is doing. If you're planning to get the debt forgiven through PSLF there's no point at all in paying more than you have to - that is, it's not a big, it's a feature. Pretty sure Georgetown isn't increasing tuition to cover LRAP payments, they'd just increase tuition anyway.

It's true that this isn't a really independent LRAP program like some (but not many) schools have, which isn't tied to income-based plans. But it's also more than many schools offer (my law school's LRAP is very very minimal, less than what Georgetown does).

This is apart from the fact that PSLF is conceptually different from income-based repayment generally, which is what the OP was talking about.


Given that Georgetown's total cost of attendance is among the highest in the nation, I don't believe the market could really support the tuition increases that they're doing without PSLF as no lawyers going into public service could handle the debt.

The Washington Post also finds that Georgetown is using tuition increases to pay for their LRAP III program, https://www.washingtonpost.com/news/wonk/wp/2013/08/09/how-georgetown-law-gets-uncle-sam-to-pay-its-students-bills/

The reason I called out the university is because how obvious they are about not wanting to pay hardly anything to support students. They tell folks to file separately for taxes and use PAYE which doesn't provide as much in interest subsidy all because the school wants minimal payments that they cover with increasing tuition revenue.

Also the school is really blatant about using the program in a way that few other grad schools are period. They're effectively telling public interest lawyers to bet the farm on PSLF and take on $300,000+ in debt in some cases without offering anything that generous. If PSLF gets capped unexpectedly or changed, then a lot of their grads would be in deep trouble.

Also the degree to which Georgetown's administration has boasted about using PSLF to give a free education to those pursuing public interest law will certainly draw scrutiny. The current Republican Congress has already passed a bill calling for repeal of PSLF for all future borrowers and exempting current borrowers. President Obama asked for the program to be capped in his budget at $57,500. The program is most certainly going to change when they start seeing the billions of dollars in bills rolling in beginning October 2017. It will start slow then become a flood as about 25% of the country could qualify from an employment standpoint. The program was intended to help college undergrads work in a charity with $30,000 in debt on a $25,000 income, not finance prestigious law school educations. Almost all the lawmakers involved in writing the 2007 law agree about that which is why I'm fairly certain it gets rolled back for future borrowers in 2017

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A. Nony Mouse
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Re: The Math of Income Driven Repayment

Postby A. Nony Mouse » Thu Dec 22, 2016 8:24 pm

I guess I don't understand why you think it's reprehensible that GT wants to pay as little as possible for its students? Of course anyone dealing with PSLF wants to pay as little as they can and get as much forgiven as they can. I get that the costs and the way it's being used to fund expensive legal degrees may well contribute to changes in the program but I don't see that GT is operating in particularly bad faith (no more than any other school relying on PSLF for its LRAP, which GT is far from alone in doing).

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Re: The Math of Income Driven Repayment

Postby bk1 » Thu Dec 22, 2016 8:33 pm

Plenty of low ranked schools (that send few people into PSLF-eligible or 6 figure jobs) have costs of attendance similar to that of GULC. The "market" pretty clearly wouldn't support taking out 6 figures to go to a whole host of law schools regardless of whether PSLF/IDR plans exist or not, but government subsidized loans have distorted the market. I don't understand how what GULC does is any worse than say, what Hofstra does (charge people exorbitant sums for a bad school).

And it's pretty normal for LRAP's to be complex and generally worse for the graduate as you go down the rankings, but with random kinks that make some better than others. For example, NU/USC's will use the average of a married couple's income if that is higher than the graduate's income, whereas GULC's will always use the graduate's (GULC also starts reducing benefits at 75k compared to 50k at NU/USC). In contrast, Yale's COAP doesn't even require public/501c3 employment. I'm not saying GULC's is actually better or worse (I'd have to spend more time than I care to to make a decision, and it may vary based on circumstances), but that it's weird to pick one LRAP out of context and go "aha!"

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studentloanplanner
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Re: The Math of Income Driven Repayment

Postby studentloanplanner » Fri Dec 23, 2016 7:15 pm

A. Nony Mouse wrote:I guess I don't understand why you think it's reprehensible that GT wants to pay as little as possible for its students? Of course anyone dealing with PSLF wants to pay as little as they can and get as much forgiven as they can. I get that the costs and the way it's being used to fund expensive legal degrees may well contribute to changes in the program but I don't see that GT is operating in particularly bad faith (no more than any other school relying on PSLF for its LRAP, which GT is far from alone in doing).


Perhaps one of the reasons is the extent to which they're promising that PSLF will take care of everything. I have no doubt there are very smart law students in their first year at GULC planning on public service who are being told by their financial aid office that they should take out as much debt as possible because it's all going to get forgiven.

I help people set themselves up for PSLF all the time in my consulting business, but that's because they already have the debt and that's their only option at that point once they have the degree. GULC in my view from what I've seen in WaPost reporting and Youtube is actively telling students that this PSLF will take care of everything, when it could very well disappear for 1L's when they need to take out new debt in their 2L year.

A more generous and reasonable LRAP program like those at the better ranked schools would allow the borrower to use something like REPAYE so they could file taxes jointly with their spouse and receive some interest subsidy benefit to keep the loan under control just in case they wanted to leave public service. Just my thoughts.

The way GULC uses PSLF is to absolve themselves of any responsibility to control costs in providing a legal education.

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Re: The Math of Income Driven Repayment

Postby NCGuy » Fri Dec 23, 2016 7:27 pm

Thanks everyone

I find this whole thing interesting. My own personal stake - I finished my legal education and work in a PSLF eligible public interest job. My decision to go to law school however was driven entirely by the availability of PSLF and income based repayment options. As a current borrower, I would likely be grandfathered in but it's still worrying for the future of my field. I've always wanted to do public interest law and I feel EXTREMELY fortunate to have that opportunity, one that I would not have if these programs did not exist. There is a small part of me that is terrified of the possibility of the GOP House getting rid of IBR (but I know that this is unlikely) or getting rid of PSLF altogether for current borrowers.

That being said, how does the legislation that was passed in the House define "current borrower?" Could a current borrower (i.e. a 1L or 2L) simply take on more debt that will later be forgiven or does it just refer to any new debt, even if the person is a current borrower? That seems to be the sticky point for places like GULC.

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Re: The Math of Income Driven Repayment

Postby studentloanplanner » Sat Dec 24, 2016 12:29 pm

NCGuy wrote:Thanks everyone

I find this whole thing interesting. My own personal stake - I finished my legal education and work in a PSLF eligible public interest job. My decision to go to law school however was driven entirely by the availability of PSLF and income based repayment options. As a current borrower, I would likely be grandfathered in but it's still worrying for the future of my field. I've always wanted to do public interest law and I feel EXTREMELY fortunate to have that opportunity, one that I would not have if these programs did not exist. There is a small part of me that is terrified of the possibility of the GOP House getting rid of IBR (but I know that this is unlikely) or getting rid of PSLF altogether for current borrowers.

That being said, how does the legislation that was passed in the House define "current borrower?" Could a current borrower (i.e. a 1L or 2L) simply take on more debt that will later be forgiven or does it just refer to any new debt, even if the person is a current borrower? That seems to be the sticky point for places like GULC.


If I'm thinking like the GOP House, you want to stop this program fast before it gets out of control so you don't want a phase in period. My thought is they pass the rule within the next 6 months to try and have it ready for next fall, or if that's too fast (which it very well might be) then they'd shoot for Fall 2018 to implement the new rules.

PSLF is written into the promissory note for all federal direct loans today. My thought is that the loans folks already have with the PSLF written into the loan documents stays, and that new debt is new debt and therefore would not have this language. After all if you're repealing the program, you'd simply change the promises made in the loan documents. So I would be extremely nervous if I was a 1L right now planning on a public interest job.

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Re: The Math of Income Driven Repayment

Postby NCGuy » Sat Dec 24, 2016 3:18 pm

studentloanplanner wrote:
NCGuy wrote:Thanks everyone

I find this whole thing interesting. My own personal stake - I finished my legal education and work in a PSLF eligible public interest job. My decision to go to law school however was driven entirely by the availability of PSLF and income based repayment options. As a current borrower, I would likely be grandfathered in but it's still worrying for the future of my field. I've always wanted to do public interest law and I feel EXTREMELY fortunate to have that opportunity, one that I would not have if these programs did not exist. There is a small part of me that is terrified of the possibility of the GOP House getting rid of IBR (but I know that this is unlikely) or getting rid of PSLF altogether for current borrowers.

That being said, how does the legislation that was passed in the House define "current borrower?" Could a current borrower (i.e. a 1L or 2L) simply take on more debt that will later be forgiven or does it just refer to any new debt, even if the person is a current borrower? That seems to be the sticky point for places like GULC.


If I'm thinking like the GOP House, you want to stop this program fast before it gets out of control so you don't want a phase in period. My thought is they pass the rule within the next 6 months to try and have it ready for next fall, or if that's too fast (which it very well might be) then they'd shoot for Fall 2018 to implement the new rules.

PSLF is written into the promissory note for all federal direct loans today. My thought is that the loans folks already have with the PSLF written into the loan documents stays, and that new debt is new debt and therefore would not have this language. After all if you're repealing the program, you'd simply change the promises made in the loan documents. So I would be extremely nervous if I was a 1L right now planning on a public interest job.


Interesting

For current 1Ls, wouldn't their 1L (and likely 2L debt) fall into PSLF? Getting two-thirds forgiven, while not ideal, is still not the worst deal.

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Re: The Math of Income Driven Repayment

Postby LeDique » Sat Dec 24, 2016 3:31 pm

A. Nony Mouse wrote:my law school's LRAP is very very minimal, less than what Georgetown does).


somehow, "very very minimal" still feels like an understatement of how minimal the program is – it's like 3 students get $5000 for up to 5 years. and they kick you out if you ever get more than a $2000 raise. it may as well not exist. ill read the rest of this later b/c i'm intrigued lol

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studentloanplanner
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Re: The Math of Income Driven Repayment

Postby studentloanplanner » Mon Dec 26, 2016 2:16 am

NCGuy wrote:Interesting

For current 1Ls, wouldn't their 1L (and likely 2L debt) fall into PSLF? Getting two-thirds forgiven, while not ideal, is still not the worst deal.


I wouldn't be so sure on 2L debt. I think they'll have a new policy in place to apply to fall of 2017 before the loans go out. Obviously nothing is happening for second semester of this year. But yes 1/3 or 2/3 I'd imagine would be PSLF eligible. Even so, that makes a big difference as to whether or not public sector work is economically feasible for anybody outside of the top schools with the most generous LRAP programs.




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