7 votes

The new Income-Driven Repayment system could cause some big problems

6 comments

  1. [2]
    skybrian
    Link
    From the article: [...] [...] [...] [...] [...]

    From the article:

    [T]he plan also includes significant changes to the country’s income-driven repayment (IDR) system that are, in the long-run, far more significant than the debt forgiveness.

    [...]

    A student that plans to enroll in IDR has no reason at all to care about the prices colleges are charging. To them, $15,000 of student debt is no different from $100,000 of student debt. For as long as the percentage of students enrolling in IDR remains small and students and colleges are unable to identify in advance who will wind up on IDR, this lack of price sensitivity among IDR participants is probably not much of a problem. But as IDR becomes the dominant form of repayment, it could become a serious problem.

    [...]

    To see how this can play out in practice, consider the Loan Repayment Assistance Programs (LRAPs) that many law schools already have.

    [...]

    [L]aw schools effectively use student debt to pay off student debt and make their schools free or nearly free, at least for these particular students.

    [...]

    At some point, it seems like expensive private universities will realize that providing tens of thousands of dollars of need-based discounts to certain borrowers who are likely to wind up on IDR does not make sense and that they should instead charge the maximum amount a student can cover through federal loans.

    [...]

    Student loans are initially paid to schools to cover the tuition and fees. But what’s left after tuition and fees is disbursed as cash to the students, ostensibly to cover living expenses. In a conventional student loan, you have reason to live frugally and take out as little debt as possible. But if you are planning to go on IDR, then your incentives flip and you are leaving money on the table if you don’t take out the maximum loan possible.

    3 votes
    1. stu2b50
      Link Parent
      I think the article is overselling it a bit. The student only has no reason to care, IF they have SO much debt that they'd save money over the long run by going the full IDR period, a whole TWENTY...

      A student that plans to enroll in IDR has no reason at all to care about the prices colleges are charging. To them, $15,000 of student debt is no different from $100,000 of student debt.

      I think the article is overselling it a bit. The student only has no reason to care, IF they have SO much debt that they'd save money over the long run by going the full IDR period, a whole TWENTY years, as opposed to paying it off early. I would imagine that's a very, very small proportion of people, and even ignoring the tax bomb at the end, it'd be a pretty financially miserable 20 years given the implications.

      With the way IDR/IBR is right now, it's more of a safety net even with the new provisions from Biden. Paying the minimums and getting the forgiveness at the end is absolutely NOT the financially optimal move.

      6 votes
  2. [4]
    MimicSquid
    Link
    There's already significant price insensitivity built into the way we currently fund higher education, with awful effects for students whose income expectations are never met. This is evidenced by...

    There's already significant price insensitivity built into the way we currently fund higher education, with awful effects for students whose income expectations are never met. This is evidenced by the current state of student loan debt. At least this will be shouldered by the government as a whole, who is better equipped to negotiate prices as opposed to on the backs of student borrowers.

    However, this is the same basic problem as healthcare. Paying individual's debts or costs without the ability to negotiate prices is a recipe for an ongoing firehose of government money being redirected to these businesses. With various necessities of civil life increasingly paid for by the government, we need it to have the ability to negotiate the amount of those payments.

    3 votes
    1. [2]
      post_below
      Link Parent
      Definitely. We keep subsidizing private industries that are part of the problem instead of following the example of (most of) the rest of the west in providing these services as a basic right....

      However, this is the same basic problem as healthcare.

      Definitely. We keep subsidizing private industries that are part of the problem instead of following the example of (most of) the rest of the west in providing these services as a basic right.

      Healthcare is a great example of how that strategy costs society dramatically more than the alternative. The numbers are impossible to argue with.

      It's more nuanced where education is concerned but we can see universally accessible higher education working in all sorts of places. I believe that, on balance, it gives more to society than it costs.

      The only semi-rational defense I've heard of not trying to go all the way with socializing these services is that the far right will try to convince everyone that any amount of socialism is bad, because communism, and maybe that will work and then progressives will lose...

      But they already shout socialism at almost everything anyway. Let them. We've put off trying to make a rational modern society under the rationalization that it's hard politically for too long.

      How do we even know these ideas can't win? We shoot down anyone who runs on them before there's a vote.

      6 votes
      1. skybrian
        Link Parent
        There is the opposite problem. If it's a state run-system then it's vulnerable to being systematically underfunded, which admittedly does keep costs down, but on the other hand I have read that...

        There is the opposite problem. If it's a state run-system then it's vulnerable to being systematically underfunded, which admittedly does keep costs down, but on the other hand I have read that the UK health care system is doing quite badly and will likely be worse this winter?

        There is always going to be a negotiation between customers and workers over compensation for expensive services, there are high stakes for both sides. I think we're still grasping for alternatives when the actual customers can't really judge quality.

        2 votes
    2. skybrian
      Link Parent
      I don't think the federal government negotiates any college prices, though? They just guarantee the loans.

      I don't think the federal government negotiates any college prices, though? They just guarantee the loans.

      1 vote