Monday, June 11, 2018

Student Loan Chatter


Today's post is about two recent articles regarding student loans that left a bit of an impression. Naturally, student loans are a topic on which I have many thoughts, though neither piece was about a situation remotely similar to mine. Please note that I'm not an expert on student loan policies and the intricacies thereof. I only have the working knowledge that comes from handling my own. I may not be completely correct in my understanding of how some of these policies work. 

Knowing What You're In For

First up, Refinery29 published a piece by a NYU student who'd already accumulated $182,000 in student loans for her undergraduate degree, and who was considering journalism school. Oh lordy! For context, that's about how much my law school student loan balance was upon graduation. After roughly 2.5 years, ~$65,500 in payments, refinancing to a 2.6% interest rate with First Republic (an option I believe is only available to high-earning individuals located in cities where First Republic operates), down from ~7%, the standard federal rates available to graduate students while I was in school, I still have about 6 years of $2,500/month payments to go, or three years at $4,500/month. (The real numbers will be somewhere in between.) 

Given how noxious the Money Diaries commentariat is, the comments here were fairly reasonable. There's really not a lot to say, now that it's too late to go back and change it, except to advise the person not to go to graduate school at this time. This scenario is tragic, not least of all because, to my knowledge, undergraduates can't take out the full cost of attendance in federal loans, so the protections of income-based repayment and possible eventual forgiveness (like in the next story) may not be available. 

Is any 18 year old (or heck, even a 21 year old considering grad school before they've started making real progress on their undergrad loans) ever fully capable of understanding what they take on when they sign for student loans even a quarter of this size? Heck, I committed to law school at 23, with some adult life experience under my belt, and I don't think I made a fully educated decision. By that stage of life, of course, that's my fault and responsibility. Intellectually, I knew I'd owe ~$2,000/month on a standard 10-year repayment plan, mostly thanks to the University of Michigan's law school "debt wizard" calculator. Even then, I still found myself a bit surprised once I graduated. Among other things, whenever I calculated my expected total balance, I never processed that I should factor in the interest that accrued while I was in school, even though I knew it was happening. (Silly of me, I know.) I also never really figured out my post-tax income. Every year (post-raise and/or after new tax laws), my paycheck is always a surprise. So I never actually knew what I'd be working with.

Obviously, nobody should feel sorry for me because everything turned out a-okay, but if I, as an adult, could find myself taken aback by some aspects of my student loan situation even after doing tons of research, I'm not sure high school students can ever truly know what they're getting into. Regardless, I can't begin to imagine how the system could be reformed to take this into account. 

On Loan Forgiveness

The next piece is from the Wall Street Journal, about the orthodontist with a million in student loans and counting, but only because they're counting on income-based repayment for eventual forgiveness, and have no intention of repaying in full, so it's not exactly what it sounds like. Most reactions I've seen are a bit ambivalent, I think because most people found the headline misleading, and were expecting to read about someone working hard and living an extremely bare-bones lifestyle in order to pay their million dollar balance in full, rather than someone making the practical and understandable decision to pay the minimum for eventual forgiveness (and living a pretty sweet life in the meantime). 

I'll be the first to admit that I don't understand loan forgiveness options particularly well. I applied for and was on income-based repayment for most of my first two years since graduation, but solely as a way of getting flexibility with my monthly cash flow (I almost always paid at least my ten-year standard repayment amount while in biglaw) and then because of the pay cut I took for my clerkship. I didn't need it because, so long as I stayed mostly in the private sector, I didn't anticipate PAYE-type forgiveness being cheaper in the long run. As seen from the math above, I'd almost certainly end up paying more on PAYE. That's often the case for other biglaw types as well, unless someone took out the entire cost of attendance in student loans (there's a lot of smaller scholarships available), as seen in the hypothetical below. Both calculations were done using this calculator.

Even if PAYE or REPAYE was likely to work out for me, I'd be terrified to have such a large and ever-growing balance hanging over my head, even if it's supposed to go away at the end. I would also live in constant fear that Congress could retract the policy without grandfathering in people who took out their loans back when those policies were in place (something that I believe is generally seen as unlikely, from following discussions of it online, but who even knows). Also, there's the "tax bomb", because the total amount forgiven is likely to be deemed taxable income. 

Did you notice either of these articles? What did you think? Do you know anyone relying on PAYE,  REPAYE, or the other non public service-linked loan forgiveness programs? I know of law school classmates with much larger student loan balances than mine, maybe veering into the territory where going for forgiveness makes sense, but everyone seems to be repaying their balances in full. I have a vague sense that the financial picture is very different for medical professionals, and that they're more likely to rely on loan forgiveness plans, as they're in school or training for far longer than would-be attorneys. 

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