New York Times: Well-Off Will Benefit Most From Change to Student Debt Relief Plan, Study Says:
With nearly one in six student loan borrowers in default, the federal government is making changes to its income-based repayment plan to help borrowers with relatively high debt and low incomes keep up with their payments.
But a report that will be released on Tuesday by the New America Foundation, a nonprofit and nonpartisan policy institute, says the changes ultimately will provide only marginal help for low-income borrowers who are at the greatest risk of default. [Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans]
Rather, the changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.
“If left unchanged, the program is set to provide huge financial windfalls to people who, far from being in need, are among the most financially well-off graduates in today’s job market,” the report says. …
The New America Foundation report says the changes to income-based repayment could provide some benefits to all participants. But the primary beneficiaries would be high-income, high-debt participants who could make relatively small payments for 20 years and then have a large part of their debt forgiven, the authors said.
The foundation cites as an example advice given by financial planners such as the Advantage Group in California. “Stop wasting your money on student loan payments,” says the Advantage Group Web site. The firm notes that an average graduate from California Western School of Law owes more than $145,000 in student loans, amounting to monthly payments of more than $1,690. But the changes introduced by the Obama administration could allow a graduate making $70,000 a year to reduce monthly payments to $448 a month and “have over $100,000 of debt forgiven,” the Advantage Group says.
The Foundation's report includes a detailed hypothetical Robert, who graduates from California Western School of Law with $121,974 in federal student loan debt and lands a job in small law firm with a $65,000 starting salary. The report concludes that the new IBR rules would forgive his remaining $160,536 student loan balance (the original principal plus $38,562 of unpaid interest) after 20 years of monthly payments ranging from $348 to $996):
(Hat Tip: Mike Talbert.)
Update: Matt Leichter, Who Knew That Law Students Were Scamming the Government All Along?:
[T]he Times drew the wrong conclusion from the study: The problem
isn’t that high-income law grads can write off large amounts of debts
after 20 years instead of 25; rather, it’s that law schools are enticing
applicants into doing so because it helps their bottom line, not
because the educations they sell are needed or will produce the kinds of
incomes necessary to pay off the loans.
