Reply to WTF? Govt rewarding bad behavior Part II

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[quote=Anonymous]Under the new version of Pay As You Earn, borrowers would pay 10 percent of  “discretionary income,” defined as total income above 150% of the federal
poverty level (about $16,000 for an individual).  After 20 years, the loan is forgiven.

Assuming that a successful college graduate would earn, on average, $80,000 per year over the course of the 20-year obligation period, the repayment burden under the new plan will total somewhere around $4,500 per year, or $90,000 for the life of the loan. A less successful graduate who earns say $50,000 per year, on average over the 20-year obligation period, would have a repayment burden of just $1,500 per year, or just $30,000 over the life of the loan.

For students anticipating an average income, Pay As You Earn provides an incentive to borrow heavily:  If you’re only going to repay $30,000 to $90,000, why not borrow $200,000?  Frugality will be for suckers.

Colleges and universities will have no incentive to control costs. Why not build that new rock-climbing wall or performing arts center? Students will enjoy it and taxpayers will pay for it.

Students have racked up $1 trillion in debt in an era when they thought they’d have to pay it back. Imagine how much they’ll borrow now that they won’t have to pay the full amount.

In a way, Obama is turning higher education in to a third-party payer system (not too dissimilar from our current health care system – which is also characterized by outsized cost increases).

Income-based repayment (IBR) is a “disaster” that could cost billions of dollars in the future. The Congressional Budget Office (CBO) estimates costs and revenues for a 10-year window: Since IBR’s costs kick in 10 to 20 years in the future, it’s being treated as free.

This allows current politicians to claim to be helping students, while forcing future politicians to figure out how to pay for it. Needless to say, that is not a healthy way to make policy. If current politicians want to help borrowers, they should be the ones sacrificing other priorities to do so.[/quote]

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