As many of you may know, I will have both of my kids in college this coming Fall semester. As I went through and pondered the ever-rising cost of education, I came across an article in the Wall Street Journal that made my head spin. It was such an eye opener for me that I decided to scrap my original article and write about it instead.
The article is about an Orthodontist that owes over $1,000,000 in student loans. He is currently paying about $1,600 a month, but his loan is growing by $130 a day and will top $2,000,000 in about 20 years. Yes, you read that right. He is paying a large sum each month and yet his loan is growing EVERY DAY. How did this happen? The answer can be attributed to higher education costs, easy credit, and wait for it, higher student loan interest rates.
According to the article, from 2005 to 2012 when the Federal Reserve lowered rates to almost zero, student loan rates rose to over 8%. In addition, the government started allowing graduate students to borrow almost any amount to cover tuition and living expenses without any concrete rules on how the funds will get paid back. That to me qualifies as beyond easy credit. This got me thinking. Will students be discouraged from attending Graduate School? Will this imbalance eventually spread to undergraduate loans? Or worse yet, will the system just continue to spiral out of control?
As I kept reading the article I realized that these astronomical loan amounts have a trap door at the end. There seems to be a government sponsored repayment plan based on income that allows the borrower to pay a percentage of their discretionary income as payment and any balance remaining after 25 years will be forgiven. The forgiven amount is then taxed as ordinary income to the borrower. The part that struck me was that the actual forgiven part/amount will then effectively be covered by taxpayers like us. I don’t know about you, but I sure would like to know how that is going to happen. How am I going to be on the hook for some other person's higher education loan? Unfortunately, I do not have the answer to that question and I’m afraid I might never find the answer to that question.
I naturally shared this article with both of my daughters and made it very clear to them that our agreement would be the same as the agreement the gentleman from the article had with his parents. I would be responsible for their undergraduate education, but all bets were off for graduate school. Who knows, either way I might somehow be responsible for paying a portion of it anyway. If you are interested in reading the entire story I have referenced in this article, please google “Mike Meru has $1 Million in Student Loans. How Did That Happen”?