If we go over the fiscal cliff, the prospects are not looking so good for anyone headed to school or anyone currently in school, and it’s particularly grim for graduate and professional students.

The link to the actual bill is here – the education section is Title V, pages 70-74. The meat of it is this:  “Termination of authority to make interest-subsidized loans to graduate and professional students… a graduate or professional student shall not be eligible to receive a Federal Direct Stafford loan… [grad/professional students are allowed to take out additional unsubsidized Stafford loan amounts – beyond the usual maximum annual amount – in order to make up for what they would have received in subsidized Stafford loans]”.
I took the liberty of rewording the last part, because the actual bill is unintelligible. Our elected officials don’t write new legislature (why would they? They have 200 years of old legislature to cut-and-paste) – they prefer to amend old stuff. Technically, this bill is an amendment of the Education Sciences Reform Act of 2002, though the education part seems to be an amendment to the Higher Education Act of 1965. Regardless, almost impossible to read without a study-guide and a glass of wine. Every single line is: “(B) – in subclause (iii) by striking “$0” and inserting “$7,000,000,000″”.

No wonder they can’t agree on how to avoid the fiscal cliff.

Essentially, interest rates for federal loans are going to double – from 3.4% to 6.8%. Additionally, there will be a strict 10 year deadline to pay them back – no matter how much they are and regardless of the major or intended profession. That seems asinine to me, since high-need occupations like social workers have an average starting salary of $24,000, but still have the same average debt as other majors & occupations – around $40,000.

On top of that, beginning with July 1, 2012, graduate and professional students will not be eligible for Federal loans. These students can receive private loans – if they qualify. But the interest rates are variable, averaging to about 12%, there are no income-friendly repayment plans, and you can’t get out of these loans even if you go bankrupt. Since interest rates and eligibility for private loans are based exclusively on credit scores, most students will not qualify at all without a cosigner who has pristine credit – those that do qualify will receive the jacked-up interest rate which can be as high as 18%.

The fiscal cliff will eliminate all sorts of longer repayment plans as well as loan forgiveness plans. Here’s what will be cut: The Public Service Loan Forgiveness (PSLF) and the Teacher Loan Forgiveness Plan (TFLP); the income-based repayment (IBR), income-contingent repayment, and graduated repayment plans.

The PSLF program will not actually be cut, but it will only be available to undergraduate students, not to graduate students – as the only loans forgiven are federal, and graduate students will be denied federal loans. The program looks like this: work in the public or non-profit sector for 10 years (not necessarily consecutive), making on-time, income-adjusted payments income, and – POOF! whatever is left of your loans after the 10 years – $1,000 or $100,000 – is forgiven.
The TRP is similar – it’s also only available to undergraduate students. If you teach in a Title I school for only 5 years, making on-time, income-adjusted payments, your remaining balance is forgiven.

The government instated these plans because there are never enough qualified people who choose to work in the public sector in the areas of greatest need: teachers, public defenders, prosecutors, social workers, and non-profit causes. New teachers rarely want to teach in an urban setting where the kids are already years behind and their meager salary barely off-sets the cost of living in that urban place. Similarly, its rare that college graduates voluntarily go into non-profit and public sector jobs, dealing with emotionally and bureaucratically difficult situations, for less pay than they would receive if they did the same level of work in the private sector. The federal government desperately needs people to take on the difficult and frustrating jobs which are aimed to benefit the middle and lower tiers of society – but the nature of the work can be so unappetizing that few individuals will find the benefits of helping their communities to outweigh the detriments of their emotional and economic difficulties.
Since the government can’t just magically create new money (oh wait… yes it can…) it barters with college graduates: “give us your time and your skills, and we’ll give you educational degrees”.

The longer repayment plans are basically adjusted one of two ways: you either base it on your income (those tend to be 25 year plans), which obviously accrues more interest, but it takes away the immediate stress of making huge payments every month; or you predetermine how you will increase your payments – which tends to be a 10 year plan, but you start with lower monthly payments and then “graduate” to higher payments as you (presumably) are promoted in the workplace. It diminishes your interest-rate debt, but relies heavily on having an immediately successful career.

With the “fiscal cliff”, all you get is the standard repayment plan – that’s the 10 year plan, with 120 equal payments. So, for example, if you have $40,000 in student debt – the standard repayment plan requires you to pay about $500 per month. That doesn’t sound completely unmanageable, especially since all us college grads are hoping to land our new, $30,000 a year job with the next application,  but let’s look at the reality: unless you obtain some kind of wonderful salaried position straight out of college (and of the hundreds of college graduates I know, from ivy’s and state schools, I know of exactly one person who has done that) you’re likely to be working on an hourly wage, at an entry-level rate. So call it 35 hours per week and $12 per hour – you’re making only about $1,200 per month, after taxes. So that $500 is 41% of your total income, and unless you’re lucky enough to live at home, you’ll need more than the remaining $700 per month to cover your basic cost of living.

In the next post I’ll actually detail the specific domino effects of the fiscal cliff on higher education – but I felt like this was getting a little laborious.