The Boomerang Generation's Student Loans

Have you ever heard of the boomerang generation? It refers to people in their 20s who have moved back in with their parents after leaving home for college and sometimes grad school. There are usually liable for a significant amount of student loan debt, so moving back home is a way to cope. I caught an interesting program today on NPR about this called The Financial Lives of the Boomerang Generation, which led me to write this article.

Although some will disagree, I don't think it makes any sense to blame the students or the parents. If one has parents willing to subsidize a roof over your head, I say great. Low overhead can be just the thing to help a person to save a bit of money to make a move. However, the boomerang phenomenon is indelibly connected to debt and a disappointing job market. So, maybe there's someone else to blame after all.

I think it's hard to ignore the massive misalignment between education and jobs. We've witnessed a lot of debt crisis lately: the mortgage meltdown, government bailouts, rising credit card defaults, and skyrocketing medical debt are a few examples. I am convinced that student loans are the next shoe to drop. Let's look back a bit. Five years ago it was clear that there was something systemically wrong with the mortgage market. Mortgage salespeople had the incentive to make any loans, including bad loans, because they could earn a fee and turn around and sell those loans off to a hungry market. A gullible, and perhaps greedy, investor market provided the cash with no risk to the originators. There's nothing wrong with a market being greedy--they're markets after all--but the incentives and risks misaligned. So, what's happening today?

Post-secondary schools are proliferating. Many of these new schools are non-traditional, for-profit institutions with abysmal graduation rates. Frontline produced an interesting program about this recently called College, Inc. These schools make money by enrolling students. The cash comes from student loans. Since education is the purported way to get ahead in America, it's an easy sell especially to people in their late teens and early 20s who don't realize because of life-long brainwashing that caveat emptor applies to education too. Moreover, it's not just for-profit colleges with unchecked incentives. Traditional colleges and universities have enrollment, budgetary, and endowment goals that they struggle to meet. These institutions are also funded in substantial part by cash from student loans.

So, what's the problem? Just like the mortgage orginators who had incentives to make loans whether or not they performed as it should, educators have incentives to provide educations that don't necessarily function as they should. I'm a lawyer, so here's an example in the law. There are nine law schools in Massachusetts and a legion of unemployed new lawyers with massive student loan debts. Many are boomerang generation members living at home and puzzling over how they will ever pay off their debts. They went to school thinking it would be a sure thing, but many are facing a life of held hostage to student loan debt.

Student loans and mortgages differ in a key way. Instead of an investor market, the money for student loans comes in large part from U.S. taxpayers who subsidize and guarantee most student loan debt. Thankfully, the government is fighting back and seeking to correct some of the misalignments mentioned here. However, these attempts, no matter how successful, will only help at the margins. Fundamentally, there is nothing that prevents educational institutions from flooding the market with graduates in fields with too few jobs. You cannot count on market forces to correct this. Market forces do not lead to a parity between graduates and jobs because education is built on dreams.

In this last matter the mortgage and student loan markets have something in common. They both have as foundational myths something close to the heart of the American Dreams. However, as laudable as home ownership and education are as goals, they must tempered with some realism. Otherwise, there will be a price to pay for unchecked idealism.

The Income-Based Repayment Plan

The Income-Based Repayment Plan ("IBR") was created in 2009 as a (hopefully) more successful plan than the Income-Contingent Repayment Plan ("ICR") was. These plans are complicated, but I'm going to try to simplify the topic with some bullet point.

• The IBR applies to Direct Loans and government-guaranteed FFEL student loans, not private student loans, Perkins Loans or PLUS Loans.
• You cannot be in default and get the IBR. However, after you get out of student loan default, you can use the IBR.
• You must be eligible for the IBR. What is required is "Partial Financial Hardship." The formula for determining this is hard to follow, but it's this: You take 150 percent of the poverty guidelines for state and family size. You compare this with your adjusted gross income. You take the difference between the two. You take 15 percent of this difference. If your annual student payments under the standard 10-year loan repayment plan exceed that 15 percent difference, you can do the IBR. Wheww!
• Payment: The 15 percent difference is also the key for determining your payment under the IBR. You just divide it by 12 and that's your monthly payment.
• Debt Forgiveness: After 25 years in the IBR, your debt is forgiven. However, the amount forgiven is taxable to you in the year of the forgiveness. There are sometimes defenses to this, like the insolvency exception.