Tonawanda News

Columns

November 27, 2012

Wasting money on student loans

Tonawanda News — The federal government dabbles in things that it was never intended to and never should. Among them is the issuance of student loans. Nowhere in the Constitution is the government granted the responsibility and power to serve as a personal lending institution. This capital-intense business is left to the private sector, which is best equipped financially and intellectually to manage the risk that comes with giving people money on a temporary basis.

The perfect example of why the government shouldn’t be funding the college dreams of young Americans can be found in the recently launched “Pay As You Earn” program (PAYE). The new plan, much more lucrative to borrowers than its earlier versions, was finalized by the Department of Education a few days before the general election (how was that for perfect timing?). Under this program, those taking out loans after October 1, 2011 will see their payments cap out at 10% of their annual discretionary income and, after 20 years, the loan balance will be forgiven.

Ponder the insanity in that. One’s payments are based solely on discretionary income – not actual income — and the government itself defines the parameters of “discretionary”. In this case, it’s too lenient in determining the cost of necessities. Such is expected when you consider that for many adults PAYE works out to be an entitlement (welfare) because they will never fully pay off their loans.

Just look at some of the examples that can be found at barackobama.com. In advertising PAYE to parents, it listed their children’s future earnings as $45,000 per year with an expected loan debt of $50,000. According to the government’s formula, the monthly payment upon graduation will be $235.

That would see the loan paid off at 18 years. But, what the chart didn’t say was that the monthly payment decreases if the graduate has a family or earns fewer dollars. So, if you just squeak in at 18 years under a scenario that’s in a vacuum, most people will never have paid back the government in full before the 2 decades is up.

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