Category: Student debt

President Trump’s Approach to Student Debt

The Trump Administration is pushing forward a broad range of policies that will impose substantial financial costs on student borrowers.   The policy levers include changes to the tax code, changes in rules governing student loan programs, and reduced consumer protections for borrowers.

Proposed Policy Change and Actions

The Elimination of Subsidized Student Loans

Currently, subsidized student loans are available for low-income students. The government pays all interest on subsidized loans while a student is still enrolled.  The Trump Administration’s budget proposes the elimination of all subsidized student loans.  As a result, low-income students will accrue interest even when in school.

Comment on Proposal to Eliminate Subsidized Student Loans: Subsidized student loans are only available for lower-income students.   The build-up of interest payments while a student is in school will have the largest impact on students who fail to graduate on time.   This provision may discourage students who leave school after their freshman or sophomore debt to reenter school later in life.   This provision will also have a large impact on low-income students in complex fields (medicine, science and law) because interest will accrue for years prior to the initiation of repayment.

The Modification of the Income Based Replacement Loan Program:

The Trump Administration is proposing a uniform set of rules for Income Based Replacement Loan programs.   People with an undergraduate education would pay more annually but would be able to receive loan forgiveness after 15 years rather than 20 years.   However, debt incurred in graduate school would not be forgiven until after 30 years.

Comments on Income Based Replacement Loan Programs:    The current IBR program has many flaws.   The modifications proposed by Trump worsen the program. 

Many people enrolled in the IBR program because they temporarily have low income and they are trying to prevent a loan default.  These people pay more under iBR than under a 10-year loan plan. Many people who enroll in IBR fail to receive any debt relief because obtaining debt relief requires that a person stay in the loan program every year.

Many borrowers will be unable to make the new annual IBR payment.   These borrowers may default or may sign up for a 20-year loan, which will cause them to pay more student loan interest over their lifetime.  It is highly likely that a substantial number of student borrowers will select 20-year repayment options because of higher debt totals and the increases in the annual IBR payment.

The Elimination of Public Loan Forgiveness Programs:

Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.   President Trump’s budget proposal would end public loan forgiveness for loans issued after July 1, 2018, except for loans needed to finish the current program.   Current law provides loan forgiveness to borrowers who have been certified to work in a public service job after 10 years of on-time payments.

Comment on Abolishing Student Loan Forgiveness Programs:  Some economists including staff at the Government Accountability Board have forecasted large costs for the current Public Service Loan Program.  Around 500,000 people have enrolled and many jobs are potentially covered by the program.   I believe the number of people receiving public service loan forgiveness may be lower than anticipated because people who leave public service employment prior to ten years do not receive any loan forgiveness.

This program will encourage some people to stay in a public service job even when more productive opportunities exist elsewhere. Proposals providing partial loan forgiveness for people serving in public service jobs for a period smaller than ten years should be considered.

Denying Access to Enrollees in Public Loan Forgiveness Programs Prior to the Elimination of the Program:

The Department of Education under Betsey DeVos has denied student borrowers with existing loans access to the public loan forgiveness program.   This administrative change is being applied to people who have already taken on debt and are currently working.  A law suit is currently challenging these denials and claims that the Administration has arbitrarily changed eligibility requirements for the public service loan program.

Comment on Denial of Access to Public Service Loan Programs:  The Trump Administration position favors taxpayers over students.   The savings to the taxpayer may be smaller than anticipated if many people do not stay 10 years in a public service position.

Consumer Protections:

Reducing Protections for Defrauded Students:

Under President Obama, the Department of Education put into place rules that provided defrauded students debt relief.   Betsey DeVos stopped work with the CFPB on student loan fraud efforts, proposed changes to the Obama-era rule that would limit the amount of debt relief given to defrauded borrower and delayed applications of debt relief until the new rule is finalized.

Comment on Reduced Protections for Defrauded Students:   The Trump Administration appears to oppose most regulations of for-profit colleges evens when there is documented abuse.

Enforcement of IBR loan application rules:

The CFPB recently found that loan servicers were illegally denying students access to Income Based Replacement loan programs. The CFPB ordered loan servicers to improve procedures to guarantee

Comment on CFPB Ruling:   The Trump Administration and many Republicans oppose the existence of the CFPB.   The Administration named an interim director who opposes the agency.   

The lack of regulation of applications to the IBR program is important because applications must be renewed annually and no debt relief is offered to debtors who do not remain continuously enrolled.

Taxing free tuition waivers, ending the tax deductibility of student loan interest and other student loan tax preferences.  

The House tax bill, which has been supported by President Trump, proposes to treat tuition waivers for graduate students and sons and daughters of university employees as ordinary income for tax purposes. The House bill also eliminates the tax deductibility of student debt, the exemption from tax for lifetime learning, and exemption from tax for employee tuition assistance.

Most of these proposals were removed from the final tax bill, which was enacted into law.  

Links to Articles Documenting These Policy Changes:

https://www.nytimes.com/2017/11/15/us/politics/house-tax-bill-higher-education-increases-tuition.html

http://www.denverpost.com/2017/11/08/gop-tax-bill-student-loan-interest-deduction/

http://time.com/money/4784214/trump-2018-budget-education-cuts-student-loans/

https://www.usnews.com/news/politics/articles/2017-05-22/budget-seeks-end-to-subsidized-student-loans-forgiveness

https://www.washingtonpost.com/news/grade-point/wp/2016/12/20/lawsuit-accuses-education-department-of-reversing-course-on-student-loan-forgiveness/?tid=a_inl&utm_term=.b62d5935222e

https://studentloanhero.com/news/betsy-devos-delays-closed-for-profit-colleges-student-loan-forgiveness/

https://www.marketwatch.com/story/cfpb-student-loan-companies-are-illegally-denying-borrowers-right-to-make-lower-payments-2016-10-31

https://www.politico.com/story/2017/11/27/consumer-financial-protection-bureau-fight-mulvaney-english-190862

http://thehill.com/policy/finance/349223-education-dept-ends-agreement-to-work-with-consumer-bureau-on-student-loan

 

 Introduction:   This post is a quick list of fiscally prudent policies that could alleviate problems associated with increased college cost and student debt.

The proposals presented here involve two approaches to the problem.  The first approach (proposals one and two) entail policies ideally designed to decrease student debt totals or at least control the growing use of debt.   The second approach entails policies (proposals two through seven) designed to assist overextended student borrowers.

All policies presented here are designed to be fiscally prudent and to balance benefits and costs of taxpayers with student borrowers.   The proposals for additional assistance to students are a fraction of the cost of proposals for free or debt-free attendance at public universities offered in the 2016 Presidential campaign.   The new proposals to assist overextended student borrowers are more effective and less burdensome to tax payers than current debt-relief policies.

I have also worked on ideas on how to lower college costs by improving on-time graduation rates and lower the number of people who fail to complete college.   These ideas will be presented in a separate memo.

People who are interested in learning more about this topic should go to my student debt book at Amazon and Kindle.

Print Version:

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Kindle Version:

https://www.amazon.com/dp/B07D9VV8K7/ref=rdr_kindle_ext_tmb

Proposal One:  Increased Financial Assistance for First-Year Students:  The primary goal of this proposal is the elimination or substantial reduction in loans taken out by first-year students.  Each state would create and administer a tuition assistance fund.   Money in the fund would come from three sources – the federal government, the state government and private donors.  The rules governing disbursement of the additional assistance would be determined by each state.

Advantages:

First-year students generally do not have a credit history and do not have a post-secondary academic record.  Many first-year students who fail to finish their degree have low incomes and substantial difficulty repaying their loans.  As a result, targeting assistance towards first-year students is more progressive than additional assistance spread over all students.

Increased financial assistance to the highly vulnerable first-year student population will result in a larger reduction in default rates than increased assistance to the general population of students.

Debt reduction targeted towards first-year students is an effective way to reduce interest accrued on student debt.

States and schools would be allowed significant latitude in designing benefits for different populations of students; although, the reduction in first-year student loan default and delinquency rates would remain an important objective of the program.

This proposal is substantially less expensive than free-college or debt-free college discussed during the 2016 Presidential campaign.  The program is not an entitlement.  The cost of the program would not exceed allocated funds.

Proposal Two:  Allocate around $100 million to a pilot program that will fund internships at start-up tech incubators.

Advantages:   Many people are taking unpaid internships to gain workforce skills. This option either adds to debt or is unaffordable for low-income students.

This program provides funds to startups with relatively little cash who might not otherwise be able to hire talent.

Only actively enrolled students seeking a degree are eligible for these positions.   The program does not take away jobs from people who are currently in the workforce.

The size of the program and the number of firms and students served is determined by funds available.   First come first served.

Proposal Three:  Interest rate reductions for older student debt balances:   Set the interest rate on guaranteed student loans to 1.0 percent after 15 years of active payments including negatively amortized payments.

Advantages: Under current law some debt forgiveness can be obtained for people who enroll in the income contingent loan programs. The automatic interest rate reduction after 15 years is easier to administer and fairer than programs offering loan forgiveness.

The interest rate reduction occurs automatically 15 years after loan repayment begins.

Interest rate reduction could not be blocked by loan servicers who currently often block annual re-enrollment in income contingent loan programs.

Loan servicers frequently fail to properly administer debt relief claims under loan forgiveness programs.

Under this program, all borrowers with outstanding student debt after 15 years will receive a lower interest rate.

This program does not provide loan forgiveness.   People who take out a 10-year student loan and pay on time will pay less than people who take out a longer maturity loan that leads to the interest rate reduction.

Under income contingent loan programs some people can increase the amount they borrow without increasing their lifetime repayment amount.  By contrast, under this proposal even with the interest rate reduction starting at year 15 total loan payments are larger for people who borrow more.

Proposal Four:  Reduce the link between interest rates on government guaranteed student debt and market interest rates: 

 Rules would be changed to create an interest rate floor 4 percent and cap 6 percent regardless of the 10-year interest rate.

Note on current law:   Current law links the interest rate on student debt to the 10-year government bond rate.

Advantages:  High interest rates on student debt was a pressing problem in the 1980s and 1990s.   A return to high interest rates would be much worse today because education costs, the proportion of students taking out debt and the amount of student debt per borrower have all gone up.

Failure to alter the link between market interest rates and student loan rates could reduce access to education or increase costs for an entire cohort of students.

This is a potentially pressing problem now that the Federal Reserve has begun raising interest rates.

Proposal Five:  Change rules governing PLUS loans to parents:  Limit parent guarantor obligations on Parent Plus Loans and Private Student Debt to Five Years after initial payment.   The student borrower would be exclusively responsible for the loan at the end of the five-year period.

Advantages:    Currently parents on a PLUS loan are responsible for the loan until they die.   Many of the parents who cosign PLUS loans for their children have low income.  In 2012, an estimated 6.2 percent of parents of dependent undergraduate students with income in the bottom quartile had taken out a PLUS loan.   More alarming, in 2012 over 11 percent of graduate students with parent + student income in the bottom quartile had taken out a PLUS loans.

Many of the parents with PLUS loans are nearing retirement.   Limiting their responsibility would reduce the number of older Americans with unpaid student debt.

There appears to be some bipartisan support for changes in laws that would provide some debt relief to parents who sign PLUS loans.   Under current law, parents who take out PLUS loans can only have the loan discharged if they become disable or if their child dies.  Under current rules, parents with PLUS loans with children borrowers who become disabled and cannot have their loan discharged.  A bipartisan bill in Congress seeks to allow discharges of PLUS loans for parents of students who become disabled.

https://www.cnbc.com/2018/12/05/she-took-out-20000-in-loans-for-her-sons-college-then-he-went-blind-.html

Proposal Six:    Reconsider treatment of student debt in bankruptcy including rules governing priority in chapter 13 bankruptcy and discharging of private student loans in both chapter 7 and chapter 13.

 The general goal is to assure that student debtors who enter chapter 13 bankruptcy leave bankruptcy after seven years with a substantial reduction in the amount of student debt they owe.

Advantages:   Many student borrowers who currently enter chapter 13 bankruptcy will exit bankruptcy without substantially reducing their student debt obligations.

This change will increase student debt payments for people in chapter 13 bankruptcy by allowing for reductions in payments on credit card debt and other consumer loans.  Total payments in Chapter 13 bankruptcy would remain unchanged but taxpayers would receive more payment and other unsecured creditors less payment.

This change would reduce the number of occasions where a student borrower dies prior to repaying his or her entire student loan.   This represent a direct gain to taxpayers because student debt, like other consumer loans, is forgiven when the borrower dies.

The new rule could be applied to both publicly guaranteed debt and private student loans.   The 2005 bankruptcy law made it difficult to discharge student debt in bankruptcy.  A return to the pre-2005 bankruptcy rules by allowing for the discharge of private student loans would allow student borrowers to accelerate payments on government guaranteed student debt.   This change would also benefit taxpayers.

Proposal Seven: Revise Public Service Loan Programs: New program will provide up to $40,000 in loan forgiveness after four years in a public service job.  Current law provides more loan relief after ten year.

Note:

The budget offered by the Trump Administration proposes to eliminate the public service loan program starting in 2019.   It is not clear how this proposal or any which passes Congress will affect people who are currently applying for assistance through the public service loan program.

Advantages:

The new law by providing limiting loan relief to $40,000 allocates more relief to people with modest debts and modest incomes, rather than relatively high-income professionals.

The shorter period for debt relief allows people to move to a more productive opportunity and reduces job lock.

Concluding Remarks:  The progressive wing of the Democratic party want free college and debt forgiveness programs.   The Trump Administration is advocating weakened consumer protections, changes to income contingent loan programs, elimination of subsidized student loans and the elimination of the public service loan program.

This centrist approach, presented here, differs sharply from both the policies offered by the progressive wing of the Democratic party and by the Trump Administration.

 

 

 

How much house can a student borrower qualify for?

This answer depends on the maturity of the student loan.

Situation:

Consider a person with a $100,000 student debt.

• The person can either pay the debt back over a 10-year period or a 20-year period.
• The student loan is this person’s only consumer debt.
•  The person earns $80,000 per year.
• The student loan interest rate is 7.0 percent.
• The mortgage interest rate is 4.0 percent.
• The mortgage term is 30 years.

Questions:

• How much mortgage can the person qualify for if the person keeps the student loan at 10 years?
• How much mortgage can the person qualify for if the person changes the student loan term to 20 years?
• What is the increased cost of the student loan payments involved by switching from a 10-year to 20-year student loan?

Answer:   I developed a spreadsheet that calculates the maximum allowable mortgage this person can qualify for.

In order to qualify for a mortgage two conditions must hold.

• Monthly mortgage payments must be less than 28% of income.
• Monthly mortgage and consumer loan payments must be less than 38% of income.

The procedure used to calculate the allowable mortgage is as follows:

• First, I calculate the maximum allowable mortgage payment based on zero consumer debt.   This value is 28 percent of monthly income.
• Second, I calculate the maximum allowable mortgage payment consistent with mortgage payments and consumer debt payments equal to 38 percent of income.   This is done by backing out the student loan and allocating the rest to mortgage debt.
• Third, I insert mortgage interest rate, term and payment info into the PV functions to get the mortgage amount
• Fourth, The allowable mortgage is the minimum of the mortgage totals consistent with the two constraints.

The calculations for the two situations presented in this problem are presented in the table below

Mortgage Qualification Example for Borrower with Student Debt
row #	Student Loan Information			Note
1	Student loan Amount	$100,000	$100,000	Assumption
2	Interest Rate	0.07	0.07	Assumption
3	Number of Payments	120	240	Assumption
4	Student Loan Payment	$1,161	$775	From  PMT Function
	Mortgage Information
5	Rate	0.035	0.035
6	Term	360	360
	Income Assumption
7	Income	$80,000	$80,000	Assumption
8	Constraint One:  Maximum monthly mortgage payment consistent with this income assumption	$1,867	$1,867	28% of monthly income
9	Constraint Two:  Maximum monthly consumer and mortgage payments consistent with income	$2,533	$2,533	38% of monthly income
10	Maximum mortgage consistent with constraint one.	$415,697	$415,697	pv of mortgage rate number of periods, and pmt where mortgage rate and payments are assumptions baed on the market and product chosen and payment is max allowable given   income
11	Allowable mortgage payment consistent with constraint two given required student debt	$1,372	$1,758	Row 9 minus Row 7
12	Max mortgage consistent with borrowing contraint two.	$305,593	$391,505	Use PV function with rate and term set by market and product and payment the amount of mortgage payment after required consumer payments
13	Allowable mortgage debt	$305,593	$391,505	Minimum of Row 10 and Row 12

 

An increase in the term of the student loan from 10 to 20 years increases the size of a mortgage a household can qualify for from $305,000 to $391,000.

Getting the extra mortgage is not cheap.  The increased student loan term causes total student loan payments to go from $139.000 to $186,000.

Concluding thoughts:  Most people who have $100,000 in student debt will have to refinance the student loan if they are going to buy a house.

 

 

 

 

 

 

 

 

 

 

Student debt and qualifying for a mortgage  — post one

Excel Topics:  PMT function and Spreadsheet design

Question:  A person graduates from college and graduate school with $100,000 in student debt.   The interest rate on a 10-year student loan is 5% per year.   The person wants to buy a house that costs $300,000 with a 90% LTV loan. The home mortgage interest rate is 4.5% on a 30 year FRM.

Assume that in order to qualify for the house the person must meet two conditions.

Constraint One:  The ratio of mortgage interest to income must be less than 0.28.

Constraint Two: The ratio of total interest (mortgage and non-mortgage) interest must be less than 0.38.

How much income does this person need to qualify for a loan on this house?

Why might student debt have a smaller impact on the purchase of a $700,000 home than the purchase of a $300,000 home.

Analysis:   The analysis for the $300,000 home is laid out in the table below.

Mortgage Qualification Example for Borrower with Student Debt
			Note
Student loan Amount	$100,000	$0	Assumption
Interest Rate	0.05	0.05	Assumption
Number of Payments	120	120	Assumption
Student Loan Payment	$1,061	$0	From  PMT Function
House Amount	$300,000	$300,000	Assumption
LTV	0.9	0.9	Assumption
Loan Amount	$270,000	$270,000	LTV * House Amount
Intrerest Rate	0.045	0.045	Assumption
Number of Payments	360	360	Assumption
Mortgage Payment	$1,368	$1,368	From PMT Function
Total Loan Payments	$2,429	$1,368	Sum Payments
Monthly Income Constraint One	$4,886	$4,886	Student Loan Payment divided by 0.28
Monthly Income Constraint Two	$6,391	$3,600	Mortgate Payment Divided by 0.38
Required Monthly Income	$6,391	$4,886	Max of income over both constraints
Required Annual Income	$76,696	$58,631	12* Max Income

Observations Pertaining to the $300,000 home for a person with and without student loans

A person with no student debt could qualify for this mortgage with an annual income of $58,630.

The person with the student debt needs an annual income of $71,585.

The impact of student debt on purchases of a larger home:   The allowable mortgage is determined by two constraints one involving mortgage debt only and the other involving the sum of mortgage and consumer debt.   When the mortgage debt is very large, constraint one (the mortgage debt constraint) will be the binding constraint.

Download the student debt and mortgage qualification spreadsheet by clicking below:
Continue reading “Student debt and qualifying for a mortgage”

Increases in Undergraduate Debt 2003/2004 to 2011/2012

My holiday visit with in-laws included less discussion of politics this year for obvious reasons but I did have a brief discussion on student debt with one relative.   His view of the issue is that since his generation paid for their college no additional cost subsidies are needed. My concern is that the recent increases in costs are having substantial adverse impacts on the current cohort of students.

I am planning several more posts on college costs and their economic and impacts.   This post looks at the trend growth of student debt between the 2003/2004 and the 2011/2012 academic years.

The Data: The source of data for this study is the NSPAS database. I was able to access the data from the NCES Power Statistics Portal.

https://nces.ed.gov/datalab/index.aspx

My variable of interest in this post is cumulative amount borrowed in the undergraduate years by people receiving a bachelor’s degree at four-year institutions.   I have presented separate tables for private and public four-year institutions.

Three statistics are presented – Average debt for borrowers, the percent of students who borrowed, and the percent of students who borrowed more than $25,000.

The data does not include information on borrowing by parents through the PLUS program.

Statistical Results:

The statistics describing change in cumulative student debt are presented in the table below.

 

Cumulative Under Graduate Student Debt at Four-Year Institutions 2004 to 2012
Bachelors Degree Four-Year Public
	2003/2004	2011/2012	Diff.	% Diff.
Average Debt for Borrowers	$11,958	$18,845	$6,887	57.6%
% of Students who Borrowed	56.6	63.5	6.9	12.1%
% of Students with debt greater than $25,000	5.3	16.9	11.6	218.7%
Bachelors Degree Four-Year Private
	2003/2004	2011/2012	Difference	% Diff
Average Debt for Borrowers	14,536	22,962	$8,426	58.0%
% of Students who Borrowed	66.9	69.1	2.2	3.3%
% of Students with debt greater than $25,000	9.6	22.9	13.3	138.0%
Both Public and Private Four-Year Programs
Average Debt for Borrowers	12,876	20,163	$7,287	56.6%
% of Students who Borrowed	60.8	65.2	4.4	7.2%
% of Students with debt greater than $25,000	6.8	18.7	11.9	176.4%

Summary of Statistical Results:

The growth of cumulative student debt among people receiving a bachelor’s degree from a four-year institution was tremendous during this brief eight-year period.

Total debt incurred by student borrowers receiving a bachelor’s degree rose by around 57% over this eight year period.

The proportion of undergraduate bachelor degree students incurring debt rose by 6.9 percentage points at public institutions and 2.2 percentage points at private institutions.

The proportion of undergraduate bachelor degree students incurring more than $25,000 in debt went from 5.3% to 16.9 percent for students at public schools and from 9.6 percent to 22.9 percent for students at private institutions.

 Other Student Debt Trends:   There are other student debt trends that need to be be addressed including  — the expansion of PLUS loans to parents, increased  use of private debt, changes in debt incurred by graduate students, changes in the number of students with excessive levels of student debt:

Economic Financial and Social Implications:

Economic issues related to the increase in student debt include – (1) A decision by many young people to live with parents and delays in starting a family, (2) a decision to delay home purchases, (3) the choice between a 30-year and 15-year mortgage, and (4) a decision to delay placing funds in a 401(k) plan.

Many older financial experts do not agree with the decision by many in the current generation to delay home purchases and delay saving for retirement.

My view is that the older generation is not in fully touch with the economic realities facing many in the millennial generation from the explosion in student debt occurring over a mere eight years.