Last week we brought you the US government’s official message [7] to heavily-indebted students.
In short, the Department of Education is promoting so-called “Income Based Repayment [8]” which allows borrowers to make monthly payments based on their disposable income. In the event a borrower cannot afford to service his or her debt — which is exceedingly likely in an economy characterized by what Moody’s calls [9] “high unemployment rates for recent graduates” — some debtors will be allowed to count payments of $0 towards the 300 “eligible payments” necessary to have the balance of their debt forgiven. In other words, if you don’t make enough money and are willing to wait 25 years, your student loans will be written off at the expense of the US taxpayer.
So that’s one option available to 2015’s graduating college seniors who, as we reported [10] earlier this month, are the most indebted college class in the history of US higher education. There are other options available as well including (gasp), repaying your loan in full and on time, but as the following graphic from the government shows, offloading some of the burden is always a possibility:
Do you have student loans? Calculate what your monthly payments will be: http://t.co/5y2HRfqkfl [11] pic.twitter.com/3AMLzjzmy9 [12]
— Federal Student Aid (@FAFSA) May 24, 2015 [13]
See the fine print on the graphic shown above. This repayment schedule assumes a "family of 1" in Alabama and a loan balance of $26,900.
The first thing to note about those assumptions is that when it comes to rentals, Alabama ranks fairly low [14] on the list in terms of how expensive it is to pay rent and as we've seen, America is increasingly a nation of renters.
[14]
Second, the average amount of student debt for a senior graduating in 2015 is more than $35,000, some 30% above the amount factored into the government's equation shown above.
[15]
So if you happen to live in a state where housing is far more affordable than it is in most other states and if your loan balance happens to be 30% below the national average, you can pay off your student debt under an IBR plan in only 240 months with a cost to the US taxpayer of only $2,355.
Now let's look at what the cost to the US taxpayer under IBR would be if you lived in say, Illinois (which is by no means the most expensive place to rent in America) and had a family of three including two parents, each of which carrying the average loan balance of $35,000 and whose combined earnings match the national median household income of $51,000 (in other words, a far more realistic scenario than the hypothetical single guy in Alabama):
[16]
Suddenly the cost to taxpayers over the life of the loans jumps by 650% when the assumptions are adjusted to reflect the 'American dream' of a nuclear family, a more realistic figure for the cost of housing, and the actual national average for graduate debt.
Consider that, and consider that if the unemployment rate edges up over the coming years, the US will be looking at [17] some $3.3 trillion in student loans.
Draw your own conclusions.
