4.24.2013

Thinking About Student Debt, IBR and the Obama Budget

As a reader helpfully pointed out in the comments section of my recent desperate plea for information concerning the reason behind increased traffic to my student loan posts, President Obama's budget apparently includes provisions for the forgiveness of interest under income-based repayment plans (IBR). For the uninitiated, income based repayment is a scheme under which those with student loan debts which might otherwise be financially crippling can pay based on their income levels rather than a typical amortization schedule. If income levels remain low enough over time, the loans are forgiven in the twentieth year.

Currently, that forgiveness event, while it sounds nice on its face, can be devastating as the IRS views it as taxable. The Obama plan would change this, and make that forgiveness event non-taxable.

While this isn't 'loan forgiveness' as some have lobbied for (and against) in the past, it would undoubtedly relieve some of the burden that those who are never able to catch up to their debt currently have. Now, it appears unlikely that the Obama budget, in its current form, would ever pass. However, many of its provisions could, and therefore this IBR forgiveness language could end up being put into place at some point.

I could spend a heck of a lot of time playing point/counterpoint with myself on the idea. Is it fair to ask taxpayers subsidize those who made the "wrong" choices (at least in supply/demand terms) with their education and educational funding plans? Alternatively, does or society really want to see a generation of retirees still paying on their student loan debt? That the average answer to both questions if all Americans were polled would likely be "no" doesn't make the situation any less difficult to sort out.

All that said, I have written extensively on this topic, both directly and peripherally in the past, and, with the help of some very educated and passionate readers, have provided some information, have asked more questions and have maybe even provided some answers.

For an explanation of the student loan debt bubble, visit here. For thoughts on the difficult job terrain which makes the loan debt question more complicated than it ever has been, visit here. For my analysis of widely-read Professor Justin Wolfers' analysis of loan forgiveness (or, the post whose traffic levels clued me in to the renewed debate), visit here. For thoughts on loan forgiveness as a political tool, visit here. Finally for some thoughts on how the student loan crisis is impacting parents, visit here. As always, thoughts on this timely and complicated topic are appreciated in the comments section below.

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