The changes initiated by the Obama administration to the federal government’s Income-Based Repayment (IBR) program for federal student loans have recently been finalized, and students can expect to see big savings in the amount they will have to shell out in student loan repayments. In other words, it just got a whole lot cheaper for students to attend school, and those pursuing advanced degrees should expect to see the biggest savings.
Here’s how the changes work. Obama’s plan, referred to as the “Pay as You Earn” plan, will reduced the cap on loan payments from 15 percent of the borrower’s income to 10 percent; loan forgiveness will be possible after 20 years instead of the previous 25. The Department of Education announced the changes on November 1st, so borrowers shouldn’t have to wait too long to begin enrolling in the new plan.
Jason Delisle, head of the Federal Education Budged Project at the New America Foundation and co-author of a new report on the “Pay as You Earn Plan” has this advice for those considering pursuing an advanced degree, specifically an MBA:
My advice to people who are about to enter graduate school or get an MBA would be to borrow as much money as they possibly can through the federal student loan program. They shouldn’t use their own money, savings, or income to pay for it because the risks or the downside of this having real financial consequences for you, provided this program is in place, are almost zero. And to the extent that there are risks, they are well worth taking because the potential upside is pretty big on this.
But obviously, as famed Chicago School economist Milton Friedman once said, “There is no such thing as a free lunch”.
So the question becomes how will the portion of the student loans that doesn’t end up being paid for by the students eventually be repaid? Debt doesn’t just go, “poof!“–not even federal government debt. Those same students who become high-earners after earning their degree–and who had a large chunk of their loans forgiven–may end up having to pay higher taxers to pay down the federal debt.
[Source: Bloomberg Businessweek]
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