If you think the liar loans that were combined with the explosive adjustable rate mortgages back in the early 2000s — the deals that drove millions into poverty, losing their homes and life savings — were bad…
You ain’t seen nothing yet!
Witness the amazing bankrupting power of the federal government on its own unsuspecting citizens…
Taking on a Lifetime of Debt
A couple months back, the Wall Street Journal did a fantastic expose that explains why so much higher education debt created by the federal government will never actually be repaid.
Here’s a summary of how one graduate loan program works:
Let’s say you take out $150K for tuition and living expenses. As of the beginning of this year, various program loan rates averaged between 5.28% and 6.28%.
Grad student loans, like most loans, start charging interest as soon as the loan is taken out. Add that interest (plus an obligatory origination fee) to the principal borrowed, and by the time a student is ready to start making payments on their loan — about two years later — the actual amount they owe has grown from $150K to $170K.
Based on a loan balance of that size, the interest payment each month is roughly $850.
By enrolling in an income driven payment plan (one that bases your payments on how much you can actually afford to pay) 10% of your discretionary earnings gets sent to pay the loan. But to cover just the interest means that your discretionary (after tax) income has to be $8,500 per month or $102,000 per year (again, after taxes). Most college grad students aren’t grossing $141K per year out of school. (A lot never do.)
So assuming you land a gig in the national average of $65,000, your monthly payment is significantly less than the interest (which gets added back onto the principal of your loan). You gotta pay the interest before you can touch the principal.
By the end of 10 years, you’ve made roughly $45,000 in loan payments, but the principal of your loan has actually grown by another $29,000.
Fast forward 25 years later, in the Journal’s example, you’ve made $185K in payments but your loan (still piling on the interest) has actually grown to $202K.
Under certain payment plans, you could be eligible for loan forgiveness after 25 years of payments. (Think about how predatory that is for one second… A loan program that offers a forgiveness plan after 25 years of making payments. Most mortgages are paid in full in 25 years or less…) Hallelujah! The end is in sight.
Not so fast. Under current laws, loans forgiven after 2025 are taxed as income. So if the government deletes your $200K loan tab… they’re going to count it as income and hit you with an additional (roughly) $70,000 TAX BILL!
Predatory lenders around the world would be proud…
A Fix That’ll be Worse Than the Problem
Bear in mind, these are all federal loan programs that are burying students and their parents in debt. That means the government could do something about them if they wanted to. Cap the amounts of loans being made. Tighten up the criteria to qualify for assistance in the first place.
But no one likes a government that says “no!”
So the program has grown and created yet another unintended consequence the government has taken it upon itself to fix.
Almost certainly they’ll make things worse for everyone. More on that in your next issue.
Make the trend your friend,
Editor, Streetlight Daily