One of my missions in life is to help our son graduate from college with as little debt as possible. My parents paid for my college education and I was able to start saving and investing right out of school. If I had a large student loan debt hanging over my head, I’m sure I wouldn’t be where I am today. I’m extremely grateful for their help and I want to do the same for our son. That’s why we have been saving diligently in his 529 college saving plan. I plan to front load his 529 so it will have plenty of time to grow. One of my 2015 financial goals is to surpass $50,000 in that account. This will give it a good head start. It will have 14 more years to compound and it should cover a good portion of RB40Jr’s college expenses.
We have been focused on saving and I haven’t paid much attention to how students are actually paying for college recently. Imagine my surprise when I read this excellent story in TIME magazine – But can America afford this approach to solving student debt? (Sorry, the link only works if you’re a subscriber at TIME.com.) It seems the federal government has become the go-to lender for college students. When Mrs. RB40 and I were in college, the federal government was the guarantor, but now they are a direct lender. As a result, the Department of Education can set new rules on how student loans are disbursed, repaid, and forgiven. Apparently, the DoED can do this without going through Congress.
There are two major loan forgiveness programs. I’ll try to summarize them here.
1. IDR – The Income Driven Repayment plans.
If your outstanding federal student loan debt is higher than your annual income or if it represents a significant portion of your annual income, you may want to repay your federal student loans under an income-driven repayment plan.
This is from the Student Aid’s website. Basically, the loan repayment is capped at 10 or 15% of your discretionary income and the balance will be forgiven after 20 or 25 years. So if you don’t make much income, you can pay a small amount every month and let your loan balloon. After 20 or 25 years, all your student loan debt will be wiped out!
2. PSLF – The Public Service Loan Forgiveness program.
If you are employed by a government or not-for-profit organization, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness Program.
Your student loan debt may qualify to be forgiven after just 10 years. This includes employees in a government organization at any level, non-profit organizations, and AmeriCorps or Peace Corps. This is a huge segment of the US population, around 25%.
Wow, these are huge programs that will cost taxpayers $250 billion over the next 10 years. Yes, you and I will be paying off these loans.
How much can students borrow?
Can you pay the whole bill with the Federal Direct Loan? Not really. There is a cap in place for undergraduate students.
- $31,000 over 4 years for dependent undergrads.
- $57,500 over 4 years for independent undergrads.
- Unlimited for graduate students.
Okay, that seems like a reasonable cap. Students can work and the parents can contribute to fill the gap. $31,000 over 4 years isn’t nearly enough to cover 4 years of in-state public college plus living expenses. Students can also apply for scholarships and private student loans from banks to help cover the cost.
Wait, unlimited for graduate students? Why isn’t there a cap here? The average tuition & fees for Ivy League colleges will be $47,697 in 2016. Add books, room and board, transportation, and miscellaneous expenses and the cost of going to a private graduate school soars to about $80,000/year. It’s easy to see how graduate students come out with six figures debt.
I don’t want to subsidize private colleges
As a tax payer, I don’t want to subsidize kids going to expensive private colleges. I got my Master’s degree at UC Santa Barbara, a public university. I crammed my undergrad and graduate education together and got my MS in just one year. Mrs. RB40 went back to school and completed her Master’s degree at a public university, and we paid the whole bill. If you can’t pay for an expensive private college, get your graduate degree at a more affordable college or just go part time. Why should I subsidize expensive private colleges?
The problem with the loan forgiveness approach is that it gives the universities incentive to keep increasing the price of tuition. The federal government will foot the bill, so why not keep jacking up the cost of college? This sounds like the same issue our health care system is having problems with. We need to figure out a way to minimize the cost increase, not subsidizing the providers.
Why should I save for college?
Let’s go back to my original question – why should I save for college if loans will be forgiven? RB40Jr can borrow from the federal government to pay for his college education. He could go ahead and get a PHD if he’d like. If he gets into a well paying career after college, then he won’t have any problem repaying the loan. However, if he qualifies for the loan forgiveness programs, he can just make the minimum payments and bide his time until the loans can be forgiven.
After reading the article, I don’t have any incentive to save extra for his college education. It seems like the best thing to do is to let what we have saved grow and he can borrow the rest. He can also get scholarships and work, of course. Maybe it will be better to set any extra money aside in a trust instead. That will give him a startup fund if he ever wants to become an entrepreneur.
I think college should be affordable for anyone, but this seems like the wrong approach. Why don’t we increase funding to public universities instead? That will make public universities more affordable to lower income students. Making community college free is a great first step. Rich kids can go to those expensive colleges.
What do you think? Are you okay with subsidizing students and expensive private colleges?