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[diffusionx]

Yea. If $100k is forgiven, that's like you got $100k in income, and you need to pay taxes on income.

I think the hope/plan with IBR was that by the time the loan was forgiven there will only be a small amount of debt remaining. The issue is that people are viewing IBR as a vehicle to discharge their SL in 25 years while making the smallest payments possible. So of course if one end up discharging $50-100K they will be faced with a steep tax bill.

I am a bit more cynical. I think the plan all along has been that Congress will change the law at some point before the first 25 year terms come due and forgive the tax bomb. But I'm not sure that will happen.

 

[CopperPuppy]

I think the hope/plan with IBR was that by the time the loan was forgiven there will only be a small amount of debt remaining. The issue is that people are viewing IBR as a vehicle to discharge their SL in 25 years while making the smallest payments possible. So of course if one end up discharging $50-100K they will be faced with a steep tax bill.

I'm completely ignorant of the "tax bomb". Is this the shock of owing more in taxes since you can't write off student loan interest once loans are forgiven at the end of IBR?

I am going to leave aside the debate of "it was a choice to take on the debt" for the purpose of my below post. Yes, I understand that; the widespread financial implications of the "tax bomb" still remain.

I'm also carving out all those with "public service" jobs from my below example. These individuals will have their federal loans forgiven in their entirety, tax-free, after ten years.

Generally speaking, the problem is that, by their nature, IBR/PAYE are more likely to be used by those with higher debt burdens, such as lawyers, doctors, or engineers. The legal profession, for instance, has a bimodal salary distribution, with the vast majority of graduates unable to service a tremendous debt burden, making IBR/PAYE the only viable option. Of course, this is also an issue for individuals taking on large debt loads to get even less valuable graduate degrees.

The higher the debt burden, the less likely it is that one's monthly IBR/PAYE payment is scraping anything off of the principal. The debt balloons accordingly. After about 25 years, the debt is forgiven in its entirety. As the tax code is presently written, cancellation of debt is taxable income (the only exception for student loans, as stated above, is under the Public Service Loan Forgiveness program). So, your artificially deflated loan payments have allowed your already-high principal balance to expand, and now you are being taxed as if the entire forgiven amount is income.

Except, you are only taxed to the extend of your solvency. Unfortunately, most borrowers will be experiencing this forgiveness in a mid-40s to mid-50s age range (assuming they began the program in their mid-to-late 20s, as most do). This is an age at which most individuals expect to have some degree of assets accumulated for family sustenance and retirement purposes (i.e. home equity, car, retirement account, etc.). These, among others, are all assets that determine one's solvency, which is the extent to which you will be taxed when your loans are forgiven. For a highly simplistic example, say you have $150k in net worth when your $200k law school loans are forgiven. You will be taxed as though you made an extra $150k that year. Unfortunately for you, most of those assets that determined your solvency (and thus the extent of the cancelled debt's taxability) are relatively illiquid, and may have to be liquidated to satisfy your tax bill. Doubly unfortunate is the fact that, in your 50s, you don't have a whole lot of time to rebuild your assets and can often ill-afford to decimate your retirement savings or lose your home.

That, in a nutshell, is the "tax bomb" problem. Anyone else feel free to chime in if I'm missing something.

 

[Kill3r7]

I am going to leave aside the debate of "it was a choice to take on the debt" for the purpose of my below post. Yes, I understand that; the widespread financial implications of the "tax bomb" still remain.

I'm also carving out all those with "public service" jobs from my below example. These individuals will have their federal loans forgiven in their entirety, tax-free, after ten years.

Generally speaking, the problem is that, by their nature, IBR/PAYE are more likely to be used by those with higher debt burdens, such as lawyers, doctors, or engineers. The legal profession, for instance, has a bimodal salary distribution, with the vast majority of graduates unable to service a tremendous debt burden, making IBR/PAYE the only viable option. Of course, this is also an issue for individuals taking on large debt loads to get even less valuable graduate degrees.

The higher the debt burden, the less likely it is that one's monthly IBR/PAYE payment is scraping anything off of the principal. The debt balloons accordingly. After about 25 years, the debt is forgiven in its entirety. As the tax code is presently written, cancellation of debt is taxable income (the only exception for student loans, as stated above, is under the Public Service Loan Forgiveness program). So, your artificially deflated loan payments have allowed your already-high principal balance to expand, and now you are being taxed as if the entire forgiven amount is income.

Except, you are only taxed to the extend of your solvency. Unfortunately, most borrowers will be experiencing this forgiveness in a mid-40s to mid-50s age range (assuming they began the program in their mid-to-late 20s, as most do). This is an age at which most individuals expect to have some degree of assets accumulated for family sustenance and retirement purposes (i.e. home equity, car, retirement account, etc.). These, among others, are all assets that determine one's solvency, which is the extent to which you will be taxed when your loans are forgiven. For a highly simplistic example, say you have $150k in net worth when your $200k law school loans are forgiven. You will be taxed as though you made an extra $150k that year. Unfortunately for you, most of those assets that determined your solvency (and thus the extent of the cancelled debt's taxability) are relatively illiquid, and may have to be liquidated to satisfy your tax bill. Doubly unfortunate is the fact that, in your 50s, you don't have a whole lot of time to rebuild your assets and can often ill-afford to decimate your retirement savings or lose your home.

That, in a nutshell, is the "tax bomb" problem. Anyone else feel free to chime in if I'm missing something.

I think you just about covered it. I would highlight the Public Service Loan Forgiveness program as the loans are fully discharged after 10 years. I meant to include it as part of my response. I think PSLF is the way to go if you want to avoid the "tax bomb" issue, many of my law school classmates have gone this route. Plus, you are giving back to society.

 

[CopperPuppy]

I think you just about covered it. I would highlight the Public Service Loan Forgiveness program as the loans are fully discharged after 10 years. I meant to include it as part of my response. I think PSLF is the way to go if you want to avoid the "tax bomb" issue, many of my law school classmates have gone this route. Plus, you are giving back to society.

PSLF is mentioned twice in my post, but you are correct. It is important to note, though, that "public service" positions are highly competitive for this very reason. If you are a recent law school graduate with a ton of debt, your two best options to service it are (1) biglaw or (2) PSLF. Both are extremely competitive as a result.

 

[Kill3r7]

PSLF is mentioned twice in my post, but you are correct. It is important to note, though, that "public service" positions are highly competitive for this very reason. If you are a recent law school graduate with a ton of debt, your two best options to service it are (1) biglaw or (2) PSLF. Both are extremely competitive for a reason.

Agreed. Needless to say, if you are a law school grad post 2008 more likely than not you have been fighting an uphill battle.

 

[Two Words]

Why exactly should students be able to discharge their debt? If you take a loan, you should pay it back. Seems like people are just wanting to have their cake and eat it too.

 

[ShironRedshift]

Why exactly should students be able to discharge their debt? If you take a loan, you should pay it back. Seems like people are just wanting to have their cake and eat it too.

Interesting... Are you arguing against the concept of bankruptcy in its entirety here? That no form of debt should be able to be discharged? If not, what makes student loans different?

 

[pgtl_10]

Why exactly should students be able to discharge their debt? If you take a loan, you should pay it back. Seems like people are just wanting to have their cake and eat it too.

Shouldn't business have the same requirements?

With regards to the tax bomb, wouldn't bankruptcy be an option then for many people?

 

[Two Words]

Interesting... Are you arguing against the concept of bankruptcy in its entirety here? That no form of debt should be able to be discharged? If not, what makes student loans different?

I suppose I don't know enough about the ins and outs of bankruptcy, but it feels wrong to me to intentionally take out a large loan, only to come out of it saying "yeah, I can't pay this back. BANKRUPTCY!"

 

[FyreWulff]

Why exactly should students be able to discharge their debt? If you take a loan, you should pay it back. Seems like people are just wanting to have their cake and eat it too.

Businesses are allowed to legally take millions of dollars in loans and wash it all away in bankruptcy. They do this every year.

But for some reason personal loans much smaller than that mean someone should have the screws turned on them for the rest of their life, and specifically because it was for their education.

Why is that so?

I suppose I don't know enough about the ins and outs of bankruptcy, but it feels wrong to me to intentionally take out a large loan, only to come out of it saying "yeah, I can't pay this back. BANKRUPTCY!"

The point of bankruptcy is to keep cash flowing through the economy and to keep people participating in the economy instead of becoming economically dead for the rest of the 60 years plus of their life. The tradeoff is that you have to "sit out" for 7 or more years. Bankruptcy costs you, but it also provides relief.

Bankruptcy also keeps lenders honest as they can't give out money with no risk to them.

 

[dave is ok]

I suppose I don't know enough about the ins and outs of bankruptcy, but it feels wrong to me to intentionally take out a large loan, only to come out of it saying "yeah, I can't pay this back. BANKRUPTCY!"

Bankruptcy exists for a reason. Sometimes people can't get out from under debt and it's better to take a huge credit hit in exchange for wiping it out.

 

[pgtl_10]

I suppose I don't know enough about the ins and outs of bankruptcy, but it feels wrong to me to intentionally take out a large loan, only to come out of it saying "yeah, I can't pay this back. BANKRUPTCY!"

Doesn't work that way. Courts actually check to see if you're faking. I had a friend who is a US Trustee. The US Trustee's job is to check bankruptcies and make sure people are filing under the right chapter.

 

[dave is ok]

Doesn't work that way. Courts actually check to see if you're faking. I had a friend who is a US Trustee. The US Trustee's job is to check bankruptcies and make sure people are filing under the right chapter.

The means test really sorts that out. If you don't have any ability to repay, you qualify for a Chapter 7. Otherwise, you file Chapter 13.

The Trustee meets with and interviews the debtor (along with hearing claims from any creditor who wants to show up) at the Section 341 meeting, which is a mandatory part of the filing process.

 

[Cels]

i'm for student loans being dischargeable in bankruptcy, but what's the incentive to the lender?

when you buy a house or a car the bank has security in that it can take back the house or the car if you default on the loan. when banks loan businesses money they look at the financial health of the business to see what kind of risk there would be. they may require some collateral as well.

if i'm a lender, i'm not going to give 80k+ to a 17/18 year old student to pay for 4 years of college when that the debt is unsecured, the student has little or no income, and most importantly, no guaranteed income after finishing college. especially now when so many people have a rough time finding jobs and have to do low-end jobs to get by while looking for something else.

there are other issues, like skyrocketing tuition prices -- which obviously is connected to the easy access to massive loans. i'm convinced the bubble has to burst at some point...

 

[pgtl_10]

The means test really sorts that out. If you don't have any ability to repay, you qualify for a Chapter 7. Otherwise, you file Chapter 13.

The Trustee meets with and interviews the debtor (along with hearing claims from any creditor who wants to show up) at the Section 341 meeting, which is a mandatory part of the filing process.

I know. Often times individuals that file Chapter 7 really are Chapter 7 but it can be Chapter 13.

People think bankruptcy is a get out of jail free card. It is not and there are a lot of rules on what needs to be done.

 

[pgtl_10]

i'm for student loans being dischargeable in bankruptcy, but what's the incentive to the lender?

when you buy a house or a car the bank has security in that it can take back the house or the car if you default on the loan. when banks loan businesses money they look at the financial health of the business to see what kind of risk there would be. they may require some collateral as well.

if i'm a lender, i'm not going to give 80k+ to a 17/18 year old student to pay for 4 years of college when that the debt is unsecured, the student has little or no income, and most importantly, no guaranteed income after finishing college. especially now when so many people have a rough time finding jobs and have to do low-end jobs to get by while looking for something else.

there are other issues, like skyrocketing tuition prices -- which obviously is connected to the easy access to massive loans. i'm convinced the bubble has to burst at some point...

I think the idea is that bankruptcy will help force changes into the higher learning system. Taking away guaranteed money will encourage better lending which will then encourage a lower amount of students, less excess in college spending, lower tuition, etc... I would think the government is best able to finance such a system.

I also wonder if converting student loans to mortgages might be a good idea. Just a thought but if people with very high loans can convert that to a mortgage then it becomes a secured loan for lenders and provides bankruptcy protection for borrowers.

 

[Kill3r7]

I think the idea is that bankruptcy will help force changes into the higher learning system. Taking away guaranteed money will encourage better lending which will then encourage a lower amount of students, less excess in college spending, lower tuition, etc... I would think the government is best able to finance such a system.

I also wonder if converting student loans to mortgages might be a good idea. Just a thought but if people with very high loans can convert that to a mortgage then it becomes a secured loan for lenders and provides bankruptcy protection for borrowers.

Lower tuition is a pipe dream. It is never going to happen. We are more likely to have free education for all than lower tuition. As I mentioned earlier in the thread, check out your local public universities operating budget. More likely than not it is well over a billion dollars a year. Remove state funding and any grant monies and what you are left with is roughly the cost of tuition.

Also, how do you convert an uncollateralized loan into a collateralized loan without a co-signee or assets to cover said loan? A mortgage works because it is secured by a the deed (collateral/asset). The theory use to be that home prices will continue to go up so your debt is secured. The value of your education is arbitrary and unsecured. Plus the banks cannot take your knowledge back.

 

[pgtl_10]

Lower tuition is a pipe dream. It is never going to happen. We are more likely to have free education for all than lower tuition. As I mentioned earlier in the thread, check out your local public universities operating budget. More likely than not it is well over a billion dollars a year. Remove state funding and any grant monies and what you are left with is roughly the cost of tuition.

Also, how do you convert an uncollateralized loan into a collateralized loan without a co-signee or assets to cover said loan? A mortgage works because it is secured by a the deed (collateral/asset). The theory use to be that home prices will continue to go up so your debt is secured. The value of your education is arbitrary and unsecured. Plus the banks cannot take your knowledge back.

The deed makes it secured. The idea is that it allows government student loans to be converted to into a secured loan in return for the government selling its interest to a mortgage lender.

 

[br3wnor]

Which is, for some reason, repeatedly ignored whenever I see someone touting IBR or PAYE. Yes, those programs are highly useful, but they are not the "set it and forget it" solutions that people think they are. The "tax bomb," so to speak, is very real, and represents the truly catastrophic debt burden that the borrower will eventually face, and likely at a financially vulnerable point in their life (entering old age).

Which is why you should plan for it. You have 25 years, hopefully when you have 10 years left you're making enough money to squirrel away what's going to user to satisfy the tax bill. Even if it's $100k, what's that end up being, $30,000-$40,000?

Not chump change but if you only save for 10 years that's $3,000-$4,000 a year. Given that your IBR payment can never be more than 15% of your discretionary income, should be realistic to attain that.

All that being said, PSLF is the way to go. I'll be student loan debt free by 40 with no tax ramifications. (On well over $100,000 in loans)

**Sad part is that legal salaries outside of big law have gotten so bad that even in public interest I'm making pretty much what non big/kinda big law private practice attorneys make with the added bonus of being able to discharge my loans through PSLF.

 

[Kill3r7]

The deed makes it secured. The idea is that it allows government student loans to be converted to into a secured loan in return for the government selling its interest to a mortgage lender.

A deed to what? The government already sells the loans. The loans are secured because they cannot be discharged.

 

[CopperPuppy]

Which is why you should plan for it. You have 25 years, hopefully when you have 10 years left you're making enough money to squirrel away what's going to user to satisfy the tax bill. Even if it's $100k, what's that end up being, $30,000-$40,000?

Not chump change but if you only save for 10 years that's $3,000-$4,000 a year. Given that your IBR payment can never be more than 15% of your discretionary income, should be realistic to attain that.

All that being said, PSLF is the way to go. I'll be student loan debt free by 40 with no tax ramifications. (On well over $100,000 in loans)

**Sad part is that legal salaries outside of big law have gotten so bad that even in public interest I'm making pretty much what non big/kinda big law private practice attorneys make with the added bonus of being able to discharge my loans through PSLF.

I generally agree that you should plan and save for it, but your example oversimplifies. Don't forget that whatever savings account you're squirreling your tax bill funds away in will also be counted as an asset that raises your net worth and thus your resulting tax burden. This should, of course, be planned for as well, which will again result in greater assets and greater taxes.

Eventually you will reach a point where your funds are sufficient despite a greater degree of savings working against you by raising your solvency. Even so, these are funds that normally would be spent on regular accumulation of assets throughout life, such as down payment on a home, retirement savings, etc. You will no longer be able to use those funds for those purposes. That is a negative both for the borrower and for the marketplace as a whole. Ideally, you will be able to do both, but the fact that that is often not the case is the very reason why we're having this discussion in the first place.

 

[ferr]

I bet you could form an LLC, take the loan out through your LLC, then file bankruptcy for your LLC to protect your personal credit.

If you can't take the loan through the LLC, you could take it personally, then write a blank check to yourself from your LLC to pay the debt, then file the LLC as bankrupt to discharge the LLC's debt. This is probably classified as fraud.

 

[Kill3r7]

I bet you could form an LLC, take the loan out through your LLC, then file bankruptcy for your LLC to protect your personal credit.

If you can't take the loan through the LLC, you could take it personally, then write a blank check to yourself from your LLC to pay the debt, then file the LLC as bankrupt to discharge the LLC's debt. This is probably classified as fraud.

Correct. This would come up during bankruptcy proceedings. Also getting access to a line of credit as an LLC is still very difficult.

 

[Iorv3th]

I don't know anything about bubbles, but yes,it should. I would never do it because having good credit is like gold to me, but if others struggle under the weight of their loans they should have the option for an out.



Bankruptcy destroys your credit. Which becomes necessary as you buy a car, or a home, or even finding a job.

I thought it only lasted for 7 years or something? That might be a long time but it's a lot less than paying student loans for 20-30 years. It also doesn't prevent you from getting a job.

 

[witchedwiz]

No..
Simply make public and superior privat univ..
Public it's Free, provided you stay on course..
Else you pay..
Private you always pay..
And before someone starts "but but i paid before, if it's Free Now i'll feel robbed"..
In the past a LOT of stuff costed more than Now (components, comodities, etc) do you feel grateful that Now it will cost less or do you childishly throw a tantrum at the past?
And i hope no "education is Free" comes up..
It's a beautiful concept but not sustainable..
In europe graduation has gone from a REAL accomplishment to pretty much a mandatory step, something like high school+..
People attendino university should be willing and MOTIVATED..
University attendance for a student in europe is only MARGINALLY covered by student tuition fee, it cost to each state a LOT of money.. Which is fine under the assumption that all university students are 100% committed! but it ain't so.. Given the "Free status" (or extremely cheap status) there are quite some dropiut..
If you start univ and you drop it, you harm your own wallet..
Conversely dropout in european university (where the REAL university cost is saddled by the country) are a waste of public money..
'Murica has it wrong by placing the full brunt of education cost on th citizens, but conversely if they change this and take some hints from euro-university system, they might as well make some improvment on the accountability..
If you drop the univ because your parents are poor and you have to work full time to help your family we're cool..
If instead you're a lazy boom, you should pay back all the tuition fee paid by the state so far..Of course some allowance for change is given: if you want to switch course you can without incur ring any fee One time only, and in that case the year count is reset, so if you studied forensics for 2 years and then want to move to computer science, if you finish cs after 3 years, it will not fault you for the 2 extra years "wasted" in forensics..
Point is, yes america's university system should be overhauled, but don't go taking european university as a prime example for "100%" correct, as in some way the excessive leniency of the european approach introduce an extra cost that might be a cold shower


Plus take Italy for example.. I'll give you some context on what our "wonderful" low cost university entails,,
Public univ tuition is cheap in bari, i was sitting on the highest amount and it was around 2-3k euro per year (think it was more near 2k)..
General tuition cost was in median around 500 per year, with tuition being Free (rather you were given 1,5k euro approx) if your income was below a certain treshold (17000 eur gross per year.. Which is low, but consider that an entry level job is 20k euro gross 24k depending on the field)..
Now as they say in Italy, make the law, find the looophole.. Incredibly the amount of paying students was really really low, guess what: via some looophole a LOT of students were able NOT to pay the tuition fee at all, and this accumulated over the year until it became a huge hole in the finance of the university of bari..
And this is only taking into account exploitation of the system and not the fact that a LOT of students drop midway..
In bari Cs course first year for bachelor is around 300+ 100 from digital comm + 100 from sw eng..
The number of students graduating by the third year is much lower..
Number of students even trying master degree is lower than 100 (i was there)..
So Free education will serve as a lamp for fireflies where un committed people will flock thanks for the lack of risk.... I mean at worst they have "just"wasted 1 year that they were not ready to commit to anything..

My two cents..

 

[Trouble]

I thought it only lasted for 7 years or something? That might be a long time but it's a lot less than paying student loans for 20-30 years. It also doesn't prevent you from getting a job.

Having really bad credit rating and bankruptcy absolutely can prevent you from getting some jobs. It's really really hard to get a security clearance if you have a bankruptcy on your credit history.

Basically most jobs in finance and anything requiring a DoD clearance will be very tough to land with a bankruptcy.

 

[diffusionx]

'Murica has it wrong by placing the full brunt of education cost on th citizens, but conversely if they change this and take some hints from euro-university system, they might as well make some improvment on the accountability..

I just want to say that this is not true. The tuition bill is not reflective of the cost of attendance, especially at state universities. It's true that states have cut funding in the past 15 years or so and this is really bad, but they still do subsidize to some extent. And college also have both need and ability based grants to defray costs.

 

[USC-fan]

The main problem is not student loans. It people finding good jobs to pay back student loans.

You are not solving any problem with this plan.

Part of the blame is college students that get worthless degrees and colleges themselves that offer worthless degrees. Sad part its not some secret that this the main reason people cant pay back student loans.

Funny thing is there are "free" or very low cost community colleges in most states. Its just not their "dream school" so they take out student loans to live the "dream."

Pro tip: Get a STEM degree. Even better start at a 2 year school and transfer into to complete the program.

 

[SMattera]

The main problem is not student loans. It people finding good jobs to pay back student loans.

You are not solving any problem with this plan.

Part of the blame is college students that get worthless degrees and colleges themselves that offer worthless degrees. Sad part its not some secret that this the main reason people cant pay back student loans.

Funny thing is there are "free" or very low cost community colleges in most states. Its just not their "dream school" so they take out student loans to live the "dream."

Pro tip: Get a STEM degree. Even better start at a 2 year school and transfer into to complete the program.

But it does solve this problem.

When you want to take out a mortgage, for example, you have to jump through a bunch of hoops. You have to show your income. The house has to be inspected and appraised, etc.

Why shouldn't the student loan process be similar? If you want to borrow $80,000 for school, the lender should be able to ask you about your plans post-graduation, what school you're attending, what degree you're planning to get, etc. And if they determine that your goals won't result in enough income to pay back the loan, they should be able to deny you.

This would, in effect, get rid of "worthless degrees" and degree-mill schools. The lenders would stop footing the bill and programs would be insolvent.

 

[AndyD]

But it does solve this problem.

When you want to take out a mortgage, for example, you have to jump through a bunch of hoops. You have to show your income. The house has to be inspected and appraised, etc.

Why shouldn't the student loan process be similar? If you want to borrow $80,000 for school, the lender should be able to ask you about your plans post-graduation, what school you're attending, what degree you're planning to get, etc. And if they determine that your goals won't result in enough income to pay back the loan, they should be able to deny you.

This would, in effect, get rid of "worthless degrees" and degree-mill schools. The lenders would stop footing the bill and programs would be insolvent.

I think the idea is that the University is partially trustee in this situation, and they are entrusted with the task of educating you into the degree and the workforce. The banks rely on the college to have vetted you as a worthy candidate of the education.

Otherwise the bank would have to look at your high school grades, GPA, SATs, essays and whatnot, which is what the college does already. Not to mention at 17 you dont have income or anything, and the first semester or year at many colleges is an exploratory one to help you decide what you want to focus and major in. If instead it were like some European systems where you apply and compete for a certain preset track, that's different.

 

[diffusionx]

Why shouldn't the student loan process be similar? If you want to borrow $80,000 for school, the lender should be able to ask you about your plans post-graduation, what school you're attending, what degree you're planning to get, etc. And if they determine that your goals won't result in enough income to pay back the loan, they should be able to deny you.

Because it's a LOT fuzzier than something like last week's paystub. Kids change plans, they change majors. They flunk out of programs. They do different things after college. Plus, in the end, a lot of how much you make after college is just about hustle and connections. There are lots of people with supposedly worthless degrees who do very well and vice versa. I see no way a bank could crunch all this in a way that is fair.

 

[SMattera]

I think the idea is that the University is partially trustee in this situation, and they are entrusted with the task of educating you into the degree and the workforce. The banks rely on the college to have vetted you as a worthy candidate of the education.

Otherwise the bank would have to look at your high school grades, GPA, SATs, essays and whatnot, which is what the college does already.

That would be fine, but that's not how the system currently works.

Because it's a LOT fuzzier than something like last week's paystub. Kids change plans, they change majors. They flunk out of programs. They do different things after college. Plus, in the end, a lot of how much you make after college is just about hustle and connections. There are lots of people with supposedly worthless degrees who do very well and vice versa. I see no way a bank could crunch all this in a way that is fair.

You're 100% right. It would be utterly impossible to create a perfect system.

But we certainly need something better. The lenders need some skin in the game.

I think there's an obvious difference between someone going to a top 100 school for engineering, and someone going to DeVry for business administration.

Also, having a coherent plan, even if the student doesn't intend to stick to it, is a good sign. It would at least force kids to study the job market and come to some understanding of the world. I have plenty of friends that did undergrad history and psych degrees from marginal schools, and were literally shocked that they couldn't find a decent job after graduation. It was legitimate ignorance on their part.

 

[Kill3r7]

But it does solve this problem.

When you want to take out a mortgage, for example, you have to jump through a bunch of hoops. You have to show your income. The house has to be inspected and appraised, etc.

Why shouldn't the student loan process be similar? If you want to borrow $80,000 for school, the lender should be able to ask you about your plans post-graduation, what school you're attending, what degree you're planning to get, etc. And if they determine that your goals won't result in enough income to pay back the loan, they should be able to deny you.

This would, in effect, get rid of "worthless degrees" and degree-mill schools. The lenders would stop footing the bill and programs would be insolvent.

IIRC isn't this what Japan ended up doing late last year when Universities started to reduce or altogether eliminate their academic programs in the humanities and social sciences. I am a huge proponent of STEM but that cannot be the only worthwhile college degree.

 

[SMattera]

IIRC isn't this what Japan ended up doing late last year when Universities started to reduce or altogether eliminate their academic programs in the humanities and social sciences. I am a huge proponent of STEM but that cannot be the only worthwhile college degree.

Sure, but at the end of the day, this is all based on hard math and realities.

You wrote that lower tuition is a pipe dream. That may be true. But it's also true that schools cannot continue to raise their tuition 5% a year each year for the rest of eternity when wages are stagnant.

There may be a value to an english degree, but it may be worth no more than $20,000. Its price should reflect market realities.

 

[JCX]

You are on the hook for taxes on whatever amount is written off at the end of IBR

So if you still owe 90K when you finish, you need to pay taxes on all of that on the year it ends.

I am going to leave aside the debate of "it was a choice to take on the debt" for the purpose of my below post. Yes, I understand that; the widespread financial implications of the "tax bomb" still remain.

I'm also carving out all those with "public service" jobs from my below example. These individuals will have their federal loans forgiven in their entirety, tax-free, after ten years.

Generally speaking, the problem is that, by their nature, IBR/PAYE are more likely to be used by those with higher debt burdens, such as lawyers, doctors, or engineers. The legal profession, for instance, has a bimodal salary distribution, with the vast majority of graduates unable to service a tremendous debt burden, making IBR/PAYE the only viable option. Of course, this is also an issue for individuals taking on large debt loads to get even less valuable graduate degrees.

The higher the debt burden, the less likely it is that one's monthly IBR/PAYE payment is scraping anything off of the principal. The debt balloons accordingly. After about 25 years, the debt is forgiven in its entirety. As the tax code is presently written, cancellation of debt is taxable income (the only exception for student loans, as stated above, is under the Public Service Loan Forgiveness program). So, your artificially deflated loan payments have allowed your already-high principal balance to expand, and now you are being taxed as if the entire forgiven amount is income.

Except, you are only taxed to the extend of your solvency. Unfortunately, most borrowers will be experiencing this forgiveness in a mid-40s to mid-50s age range (assuming they began the program in their mid-to-late 20s, as most do). This is an age at which most individuals expect to have some degree of assets accumulated for family sustenance and retirement purposes (i.e. home equity, car, retirement account, etc.). These, among others, are all assets that determine one's solvency, which is the extent to which you will be taxed when your loans are forgiven. For a highly simplistic example, say you have $150k in net worth when your $200k law school loans are forgiven. You will be taxed as though you made an extra $150k that year. Unfortunately for you, most of those assets that determined your solvency (and thus the extent of the cancelled debt's taxability) are relatively illiquid, and may have to be liquidated to satisfy your tax bill. Doubly unfortunate is the fact that, in your 50s, you don't have a whole lot of time to rebuild your assets and can often ill-afford to decimate your retirement savings or lose your home.

That, in a nutshell, is the "tax bomb" problem. Anyone else feel free to chime in if I'm missing something.

Very interesting, this is something I hadn't heard about before. Appreciate the detailed explanation.

 

[FyreWulff]

Pro tip: Get a STEM degree. Even better start at a 2 year school and transfer into to complete the program.

Ah yes, have everyone get the degree so there's no diversity in the job market and your job will get outsourced within 3 years anyway. The STEM circlejerk is sad, and I say this as a programmer. This crap where people devalue other majors because they aren't as 'objective' as STEM is silly.

And after we've flooded the market with STEM degrees you'll have successfully pushed the STEM job wages down because STEM degrees are a dime a dozen. This has already happened with law degrees. Everyone saw "it pays great, you should only get that one!" and now new lawyers ain't gettin paid shit.

 

[Vicetrailia]

The main problem is not student loans. It people finding good jobs to pay back student loans.

You are not solving any problem with this plan.

Part of the blame is college students that get worthless degrees and colleges themselves that offer worthless degrees. Sad part its not some secret that this the main reason people cant pay back student loans.

Funny thing is there are "free" or very low cost community colleges in most states. Its just not their "dream school" so they take out student loans to live the "dream."

Pro tip: Get a STEM degree. Even better start at a 2 year school and transfer into to complete the program.

Keep in mind that at a community college you're not likely:

1. Getting an Internship and/or doing CO-OP.
2. Getting leadership experience through industry relevant student organizations or other.
4. Networking and getting interviews. Ever been to a community college career fair?
Bonus: Doing research projects chartered by the companies in industry/institution.

There are core things and community college has very limited opportunities on these matters, unlike at the UNI. There needs to be a push to catch CC's up. So, when you get out of CC, you gotta make sure that you hit the big 3. You don't want a full-time retail job bogging you down, make it industry relevant at least (but then it's hard to get involved).

 

[Kill3r7]

More people should consider universities that offer Co-Op programs or have strong ties to industry if you are going the STEM route (industry funded undergraduate research). These programs help you network, explore the industry of your choice and might help land you a job offer before your graduation.

 

[ZombiePlatypus]

When you build a bubble on indentured labour and human misery, I really don't give that much of a fuck if it bursts.

.

 

[Harry Stewart]

My two cents..

Good post. Don't know how it is in Italy but here in Switzerland in order to offset non-motivated people from attending Uni, if you fail a faculty two years in a row you're barred from it and if your GPA is particularly low two years in a row you're barred from all Swiss public universities for life. Plus there's a healthy and well publicised apprenticeship system to not make Uni seem like the only option early on. The US is like the worst of both worlds. Uni is high school+ AND it costs an arm and a leg.

 

[Rembrandt]

0% interest rate and require payment on loans only once a certain income level is reached.
.

that works for me, tbh.

fuck student loans and I don't even have a shitload like some people, though that may change.

 

[antonz]

Not really keen on the idea of get an education then bankrupt your way out of repayment but I do certainly think it needs to return to where Government Funded Loans are investments into the future of the country that while needing repaid are not a money making scheme for corporations to exploit.

A Government provided loan should be viewed as the government attempting to better its populace. Not a way for the government to sell indebted students to loan collectors for a fraction of what was actually loaned in the first place. Loan should be paid back at realistic levels and in a way that people shouldn't feel they need to go bankruptcy in the first place.