Obama's "(Don't) Pay As You Earn" Program

Recently, the WSJ had an article drawing attention to Obama’s changes made to the student loan system for higher education. The article, while it raised good points, did not go far enough to explain the detriment to our economy that his program is causing.

President Obama is intentionally undermining people’s successes — and our nation’s success — by encouraging large amounts of graduates to go into the government and the non-profit sectors and then subsequently forgiving student loan debt. This practice is both a) incompetent as a matter of economics and b) devious as a matter of policy.

Indisputably, the driver of economic growth in our country’s history has been the free market. By having the forces of supply and demand set prices for different things and wage levels for types and quality of labor, people were able to make logical choices of what businesses to go into, and what jobs to study and train for. The higher paying jobs were those most productive to society and had the logical effect of encouraging economic growth. Individuals could match their skill set with their desire to earn money to find their best employment, and would be maximizing the country’s economic growth as a by-product.

While non-profits have in important place in our society, they do not play an important role in actually driving our economy, which is something we desperately need right now. Discouraging economic growth, and paying a high price to do so, is certainly not smart.

Likewise, the other sector in which Obama is encouraging students to find work is the government. In the past, the public sector may not have paid as much as the private sector. Today, however, the public sector is better paid with more generous benefits, making it a very lucrative career path. How then, can Obama justify student loan forgiveness for government workers who will actually earn more than their private sector peers, who are also the ones who have to fulfill their contractual obligations to pay back their student loans?

One of the provisions of student loan reform is that Obama made certain student loans “non-taxable” if the loan is forgiven, while keeping other loans taxable as income received. This inconsistency creates confusion regarding which loans have what kind of classification.

In general, if someone forgives a debt, like a credit card company, if you racked up $10,000 in debt and settled to pay off $5,000, the IRS considers that you received $5,000 of income from the loan forgiveness; you will receive a 1099 for it, and will be expected to report it as income on your taxes. On the other hand, if you work in a qualifying field in exchange for income and also student loan forgiveness, you have a scenario that is truly the very definition of income — and yet Obama has given a free pass to some loans by making their loan forgiveness also non-taxable.

Obama is essentially picking winners and losers in particular industries through the student loan programs and masking it under student loan forgiveness and “non-taxable” categories. This is underhanded policy.

This mindset is one that suggests to and encourages students to take large amounts of student loans and then go into the sectors where their loan can be forgiven — not into the sectors where they would be most productive, and therefore most likely to earn enough to pay it back. It’s like saying to the students, “Here’s a way to not pay back your loans!”. Frankly, that’s criminal. And it fundamentally subverts the basis principles of logic and economics. Also, I can tell you as an accountant, the numbers for Obama’s student loan policy simply don’t work.

For example, if someone borrows $30,000 a year for 4 years for a degree, that is $120,000 of student loan debt. The debt carries an interest rate of at least 6%. The Obama repayment plans offer an option that allows borrowers to pay 10% (it used to be 15%) of what they earn, and if not fully paid back by the end of ten years, any balance is forgiven.. So for instance, if a new graduate lands a job that pays a generous $50,000/year, he/she would pay back $5,000/year. With interest of at least $7,200 ($120,000 x 6%) which likely does not even cover the interest on the original $120,000 loan.

There is almost no way a borrower can begin to pay back anything on their loan, and by the time they actually can make a dent, the additional interest accrued would have ballooned the total loan amount to at least $150,000. This is financially crippling for a young person.

In essence, what Obama is doing to win over the young people voting bloc is simply telling them another huge lie. He is suggesting they take out loans on which they will never be able to pay back the principal. The numbers do not work. It’s a terrible gamble; no student can pay off the loan in any rational way from any jobs in the fields they are encouraged to enter to in with the incentives offered to by the Obama Administration.

The costs for “Pay As You Earn” have ballooned from $1.7 billion in 2010 to $3.5 billion in 2013 to an estimated $7.6 billion for 2014.

This might seem like a windfall for the students, but the only clear winners are the universities that are the ultimate recipients of the taxpayer money. While the students may technically get the freebie, the impressionable youngsters, who likely have little or no wealth, are being given an enormous financial incentive to pursue careers in government or at low-paying nonprofits.

The consequences for our economy are no less tragic than for the individual borrowers. They are being driven away from the path down which their natural ambition and talent might have taken them. President Obama keeps talking about reducing income equality. So why does he keep paying young people not to pursue higher incomes?”

The real impact of this higher education reform is that the government is now encouraging people to borrow substantially for their education, while simultaneously providing an avenue for students to avoid paying back the funds — leaving the taxpayer on the hook, a deficit in freefall, and an economy in stagnation.