Do The Math on College Costs and Student Loans

There’s an interesting (and possibly maddening) math problem emerging associated with college costs and student loans. College costs have steadily risen. Because of that, student debt has skyrocketed right along with those costs, more than quadrupling from 2003 to today. Students now owe some $1 trillion in student borrowing debt, and some estimates say that will double by 2025. And the governments profits from making these loans has increased dramatically.

What? Isn’t the government student loan program designed to help students get low-cost money for school? How can this benefit the government? Quite well, thank you, if this Huffington Post story is any indication. According to HuffPo, citing the Congressional Budget Office, “The U.S. Department of Education is forecast to generate $127 billion in profit over the next decade from lending to college students and their families.”

How can this be?

“The [federal student loan] program produces a profit because the interest rate paid by borrowers exceeds the federal government’s cost to fund those loans and administer the program. The figure also accounts for loan defaults and borrowers’ use of flexible repayment plans that tie monthly payments to their incomes.”

And because the White House and the Education Secretary are politically bent on reducing the cost of of such programs to taxpayers, there is a growing concern that the Education Department will become ever more reliant on student loans to give some relief.

“This is a profit-making machine for the Education Department,” one watchdog tells the Huffington Post. “The student loan program isn’t about helping students or borrowers — it’s about making profits for the federal government.”

There are, of course, student loan forgiveness programs that the government has enacted, but as this piece by Consumerist.com points out, that has created a whole new set of worries: Namely, that people are rushing to use them, exceeding expectations by 90 percent, as the Wall Street Journal points out.

The debt forgiveness program, Pay As You Earn, allows borrowers to pay 10 percent a year of their discretionary income in monthly installments. The unpaid balances for consumers working in the public sector or for nonprofits are then forgiven after 10 years and those working in the private sector after 20 years.

But numbers say that students graduate from college with borrower debt between $26,000 and $29,000, and even with forgiveness, as a study by Demos.org notes, reduces a person’s wealth over the course of a lifetime.

So, what can student borrowers do? The best option, says CNN Money, is finding an “income-based repayment plan,” noting “These plans cap eligible students’ payments based on what they earn, making it easier for low-income earners to afford their loans.” This Income Share Agreement is emerging as a win-win for lender and students alike. These alternative financial products are being innovated by Pave, Upstart, Lumni and Cumulus Funding.

Given the political tug-of-war over the federal programs and the out-of-control costs of tuition and debt, the Income Share Agreement may soon be the only reasonable option for students looking to pay for college in a way they can actually pay back.

Additional Sources:
http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth
http://money.cnn.com/101/college-101/student-loan-payment.moneymag/