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Color of Money

Personal Finance

Michelle Singletary and Robert Reich
Washington Post Business Columnist and Former Labor Secretary
Wednesday, January 5, 2005; 1:00 PM

Join Post personal finance columnist Michelle Singletary and former Labor Secretary Robert Reich online Wednesday, Jan. 5 at 1 p.m. ET for a discussion about reforming the U.S. student loan system.

As Singletary wrote in her Nov. 28 column, Reich envisions a "student loan program in which people who borrow to attend graduate school would then pay back a small percentage of their annual salary over a 10- or 15-year period? Everyone would pay the same percentage regardless of income. All the money would go into a general student loan fund and then be lent to others for graduate school. Private lenders could provide the loans, which would be guaranteed by the federal government."

_____Michelle's Column_____
The Color of Money

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


Michelle Singletary: Happy New Year. Wow 2005 already. But I'm really excited about this coming year. I think big things are in store for me and I know many of you out there. For one thing, the New Year gives you yet another chance to get your financial life in order. And if you have financial order, the New Year can bring new opportunities.

Okay enough about what I think.

I'm very excited and pleased to have Robert Reich join me today. I think he has some very interesting ideas about the growing student loan burden many people are facing. So let's get started.


Annandale, Va.: You rock Michelle! I really cheered your column on student loans. Far too many shy away from useful majors in the humanities and sciences because they are convinced that they need a business oriented degree to get a decent job and pay off the loans. The next "Sputnik" won't be lauched from the US as a result. How sad.

Michelle Singletary: Thanks. Never thought that I rocked. But I like.

And you are so right, which is why I'm having this chat.


Washington, D.C.: Dear Ms. Singletary and Mr. Reich

Many thanks for holding this chat. If grad school were affordable I would have gone a long time ago. But the possibility of taking on more than 50K in debt just to get a graduate degree on top of my already sizeable undergrad loans really made me think twice and be hesitant. Also, if a grad degree were to cost that much, then possibilities for employment would have to carry the promise of a high salary to pay it back. Hence low-paying but important occupations like teaching or public service is discounted over having to pay back those loans. My question -- is the reform measure that is being proposed set for implementation or is it still just in the idea stages? I would love to see a reform of the student loan system soon preferably so I can take advantage of it.

Robert Reich: Still at the idea stage. But I don't see why Congress couldn't take it up this session. It's a potentially important innovation that would make it possible for many grads to take jobs they would love to take but dare not now because of giant loans.


San Diego, Calif.: Just so I understand your proposal, when paying back the loan at a set percentage rate (same for everyone regardless of income), once your specific loan amount is repaid, then that would be the end of ones payments, or, are you suggesting that everyone pays back the same amount regardless of your loan amount?


Robert Reich: The idea is simple. Everyone would be required to pay a certain percentage (say, 3 percent) of their earnings for the first ten years of full-time work. If you took a job that paid relatively little, your total repayment would be less than someone who took a job that paid a lot. In other words, the person in the high-paying job would in effect be subsidizing the loan-repayment of the person in the low-paying job.


Washington, D.C.: Michelle,

Happy New Years. For Christmas my parents gave me some money to help me repay some of my debt. I currently have one credit card with a balance of $5,000 at roughly 20% and a outstanding car loan of $20,000 at 6%. I am always hearing that I should pay down the credit card balance with the highest interest rate first. But does this hold true for car loans versus credit card loans? I am currently paying $83 a month in interest on the credit card and $100 a month interest on the car. Even though the credit card has a higher interest rate would it not make more sense for me to pay down the car loan first, at least to the point where the dollar amount of interest I am paying on the car loan each month is equal to the interest I am paying on the credit card each month. Thanks for your help.

Michelle Singletary: First of all I hope you send a very nice and LONG thank you note to your parents. Now, here's what you should do. Take some of the money your parents gave you and put it in your emergeny savings account (you know the acct you should have with three to six months of living expenses). From your question I don't know how much they gave you but put something away. I know you might be tempted to put all the money toward debt repayment but frankly if you had to get money from your mommy and your daddy I'm betting you don't have ANY money saved -- and you need that. Now take the remaining amt and pay down on the credit card. What you heard was right pay off that high interest credit card FIRST.


Arlington, Va.: Would the interest rate of repayment be determined by the private lender? How soon do you see such a system to go into effect?

Robert Reich: In my proposal, the rate of interest could either be determined by private lenders -- who, presumably would offer the lowest rate possible, given that they'd like the business and don't want it to go to competitors. Or, alternatively, government could set the rate (remember -- these are guaranteed student loans).


College Park, Md.: Many of the low-paying jobs you cite, such as teaching, public defenders, and doctors in underserved areas, get substantial loan assistance, even complete repayment, precisely so these debt-ridden graduates can work there. I have many friends utilizing these resources in all of these fields and more.

However, I also know too many people that don't know what they want to do with their lives, enjoyed college life and decide to prolong it. Unfortunately, they often go to some expensive private school to get a degree they will never use. I do not want to pay for that.

At what point do we expect people to take responsibility for their decisions? If they choose to go to an expensive school, they need to know they are responsible for that. If they want that theatre masters from a private college - fine. But why not consider the same degree from an in-state school? Why not consider teaching in a public school system with a tuition assistance program? Why not consider the financial burden of their decision?

I have a PhD and make peanuts in research, which I dearly love. I had no family financial help, so I planned my education carefully - I went to an inexpensive in-state school on scholarship, worked hard to get a paid fellowship for my graduate work, etc. My sister, single mother of two, worked her way to a masters in social work (not exactly high paying) because she went to a local state school at night and applied for Pell grants. We are both debt free and did it without family help.

You don't have to graduate $50K or more in debt, but some people choose to. I don't want to pay for their decisions.

Robert Reich: Of course people need to take responsibility for their decisions. The proposal we're discussing doesn't let anyone off the hook. They still have to pay part of their earnings into the loan pool. The point is not to make it difficult for them to take a lower-paying job, which they might prefer, over a higher-paying job that they feel they must take in order to repay the loan. In many fields -- social work, public-interest law, social entrepreneurship, and so on -- recent grads are reluctant to enter because of the debt burden.


Washington, D.C.: To Robert-
Do you envision that this program would apply only to those in graduate programs? If so, I can see where this might be an incentive for some to obtain a graduate education (since it's tied to income and not actual dollars), particularly if the current student loan programs and the way loans are paid off remain in place.

Robert Reich: I'd hope that this program could be extended to undergraduates as well. Many people who graduate from four-year colleges and universities with a lot of debt face the same dilemma -- you can't take a job you love or believe in because of the debt load you've taken on to finance your college.


Washington, DC: I confess I am unfamiliar with many of the details about this idea, but find it intreaging.

If you go to an expensive grad school but end up with a lower-paying job (social service, teaching, etc.), you will likely not pay back the entire loan amount in 10-15 years. How will this be accommodated? thanks.

Robert Reich: Let me give you two examples.

Person A owes $25,000 on his or her college or grad loans. This person takes a full-time job after graduating as a legal aid attorney. It pays $50,000 a year. Person A would pay (if we assume 3 percent per year) $1,500 that first year, and another $1,500 every year for the next ten years (that's the duration I'm proposing) so long as his or her salary remained at $50,000.

Person B owes the same -- $25,000. But this person takes a full time job with a law firm that pays $100,000 a year. This person would pay $3,000 a year, for ten years (assuming the salary doesn't change).

In effect, person B is paying off part of person A's loan. But that's okay. Person B is making far, far more money over this period than person A.


Washington, D.C.: As a student who just finished grad school, and owes a grand total of $145,000 in student loans, I have to respectfully disagree with your idea. It was my choice to take on so much debt in order to pursue my chosen career. I wasn't able to find a high-paying job, but I am paying back my loans regardless, by budgeting what income I do receive. I don't want to be subsidized by others, and had I gotten one of those jobs, I wouldn't want to be penalized for that achievement. Some graduate programs already have enough people who attend because they can't decide what else to do, or think they'll walk into big money just by graduating. People need to be resonsible for their own choices.

Robert Reich: Under my proposal, no one would force you (or anyone else) to enter into this loan program. You enter into it only if you want a government-subsidized (that is, government guaranteed) loan, which -- because of the subsidy -- charges a lower interest overall than you could get otherwise. Even if you enter a high-wage occupation after graduating, and you end up subsidizing people who enter a lower-wage occupation, you're still getting a good deal -- in fact, likely a better deal than you could get without the government-subsidized loan in the first place. But, again, it would be your choice.


Washington, D.C.: How do you get everybody to participate in your proposal, rather than game it?

I forsee MBA's and Law Students taking out loans in some other system so they don't have to subsidize other students....how would you compel them into your system?

Aren't these two profesional groups the key?

Robert Reich: Professional groups would be helpful, of course. But as I mentioned a moment ago to another questioner, even relatively higher-wage debtors would find this a good deal because the original loan is guaranteed by the government. They don't have to get a government-guaranteed loan to begin with, of course, but there's no reason to expect they'd be willing to pay the higher interest rate that goes with a non-guaranteed loan. In other words, no real "game" here.

Michelle Singletary: Hey if you folks like this idea e-mail your Congressional representatives my column (the one in which I introduce Reich's idea. You can find it on my archive page on the Post web site). Also e-mail them the transcript of this online discussion. This is after all a government of and for the people. So if you people write and call perhaps we could get a House or Senate member (or both) to sponsor a bill on this very issue. Who's with me??


Philadelphia, Pa.: How would you determine annual income under this program to avoid cheating? Would it be taken according to an amount listed on tax returns, or how?

Robert Reich: Yes, the easiest way to do this would be to take the annual income that appears on one's tax return. Of course, there's no guarantee that someone won't cheat on their taxes, just like there's no guarantee that someone won't cheat on this program. But cheaters often get caught. And the vast majority of people don't want to cheat anyway.


Exton, Pa.: While Congress "could" take up this issue this year, what do you think the chances are that this would happen? What do WE need to do to help push it along? (And how long do you think it would take to actually get legislation written and up for a vote?) My husband is SO anxious to go back to school to get his PhD, but with no scholarships available to grad students, a bit of undergrad student loan still being paid off, and two kids wanting to go to college - it seems like a pipe dream unless something like this would become an opportunity. HOW CAN WE MAKE IT HAPPEN?

Robert Reich: This is a sensible proposal that would not cost the government a single extra dime -- and it's not ideologically tilted. That is, there's no reason why Republicans would find it any less attractive than Democrats. So I'd recommend that you write your congressman or congresswoman, and Senator, and find others from other congressional districts and other states, to do the same thing. You'd be amazed at how quickly a good idea, supported by constituents, sees the light of day.

Michelle Singletary: See, write, call. We can do this!


Lyme, Conn.: Your proposal is an interesting one. One of the difficulties seen in attracting young professionals, especially in health care professions, to work in low income areas is they can not afford to accept such jobs because they have large school loan debts to repay. Do you think acceptance of your loan idea would allow more college graduates and health care graduates to go to urban or rural areas that need professionals yet will not pay as well as suburban or wealthy urban areas will pay?

Robert Reich: Yes, absolutely. I've spoken with many undergrads and also students in graduate programs across the United States who would like to go to urban and rural areas that need their services, but who can't afford to because of the crushing burden of their student loans. In other words, this proposal isn't just good for young people who'd like to make a difference; it's also good for the country.


Washington, D.C.: I think this is a great idea.
I plan to enter law school this fall and the loans are daunting - $150K + to get the degree. Though I've been a public interest/non profit worker for the last 5 years, I HATE the idea that I'll have to "go corporate" to pay these back. Loan forgiveness won't pay this kind of debt. It's sad that the people I want to serve-- low income people-- get hurt because of our educational pricing sytems.

Robert Reich: But that's precisely why the proposal I'm making is important. It could help you.

Michelle Singletary: I believe in action. And so you don't have an excuse not to write (like you don't know whom to write or where)go to www.house.gov/writerep to find out who represents you in the House and his or her contact information. For the Senate, go to www.senate.gov.


Washington, D.C.: I'm a recent college graduate and soon to be law student focusing on Environmental Law. It depends on the job market the time when i graduate from law school whether or not i will take a job in the private industry or non-profit sector. I already have $60,000 of debt due to undergraduate loans and am looking at being about at least $120,000 in debt after law school and am footing the bill myself for MY education. I don't think paying a set percentage back to student loans is a good idea at all. If I did that right now- I wouldn't be able to afford to live and work at my current job in D.C. The cost of living is different around the country and what you'd end up doing is forcing the middle class background students from working in big cities and instead living with their parents until they're 35! Perhaps something else that should be done is lowering the cost of higher education so we don't have loans that are as much as the cost of a house. Then we could take the lower-paying jobs that we want to do over the nice salary figure at a job we loathe.

Robert Reich: I'm all in favor of lowering the cost of higher education, as well as the cost of undergraduate education. All of this has been rising faster than inflation, as you of course know. The other part of the problem is that grants and scholarship aid are drying up, so more and more students have to rely to a far greater extent than before on student loans. (Fifteen years ago, the student with financial needs got 60 percent of those needs taken care of through grants, and 40 percent through loans; now it's just the reverse -- 60 percent loans and 40 percent grants.) There's a lot that needs to be done, but we have to start somewhere. And this idea seems like one place to start -- again, because it doesn't cost the government anything, and yet has the potential to allow graduates to do what they want to do rather than go into a job just for the money.


Potomac, Md.: Mr. Reich proposes that the loans would be guaranteed by the US government. What safeguards does he envision to prevent abuse such as medical students whose med school tuition was paid by a community needing doctors in exchange for an agreement to practice medicine in that community for a specified number of years but who welched on the agreement. It would appear that such abuse could be avoided by the government by tracking the location of the student through his/her social security number and enforcing the agreement they had made but that doesn't seem to be done.

Ed Ver Hoef (rhymes with fur roof)

Robert Reich: The government already provides government-guaranteed student loans (at a lower rate than the private market). And yes, there's some percentage of these loans that is never paid back because a few people are irresponsible -- and are willing to face penalties and fines. That's true now, and it would be the case with my proposal as well.


Washington, D.C.: It isn't always about choice... This process would be a gift to lower achievers that couldn't get into private jobs. Now, when they get their B- average, they don't have to worry about paying back loans and can live off a welfare-like system. Sure, this may allow for some high acheivers to take lower paying jobs, but I'd bet fewer of these people would do so than the reverse situation. High achievers strive to make the big differences, this (realisitically) can't be done by taking a public high school teaching job.

Robert Reich: I know of a lot of high achievers who have taken low-paying jobs because they loved the work, and/or they thought the work was socially important. And I've come across many, many high-achieving students and grad students who would like to take lower-paying jobs for the same reason, but cannot due to the burdens of repaying their student loans.

Michelle Singletary: Oh, I so beg to differ with you about what makes a BIG difference. Please. Remember when the gov't shut down. All of us who mock government workers finally realized how much they really do.

And don't you get me started on your comment about about not making a big difference as a public high school teacher. Shame on you. Teachers are a gift from God. They are teaching OUR future and that is one of the MOST important jobs in this country.


Durham, N.C.: How would this program end up with enough money to support the program? For example, if getting a master's degree in education costs roughly 20-30K for two years of graduate school and beginning salaries for teachers are 20-35K depending on location, then 10% of yearly salary for 10 years would pay for the original loan but not for interest. Now add on loans for the 4 years of undergraduate education and assume that your debt burden is 30-45K and you have not paid enough into the system to maintain costs.

Robert Reich: The specific percent of full-time earnings to be charged and the duration of the pay-back period would both be calculated to ensure enough money to support the program. I'm assuming 3 percent for 10 years, and I'm also assuming that every student (undergrad and grad) that takes out a government-subsidized (guaranteed) loan would have to participate as a condition of getting the subsidy. That's a big pool. Many people in that pool will go on, after graduating, to take higher-paying jobs. And these higher-paying jobs will offset whatever deficits might be created by people in the lower-paying jobs (such as school teaching).


Washington, D.C.: Under your proposal, would there still be a two tier system where governement loans are only available up to a certain amount (around $20K right now, I think) and then the rest would have to be taken out in private loans?

Robert Reich: Yes, I think the government-subsidized loan available to any person would have to be limited, as it is now. I wouldn't put the limit as low as $20K. As a recent questioner remarked, $20K covers only a fraction of the costs of most undergrad or graduate tuitions -- with the result that most loans (government and private) are much larger. I'd have to examine the government program a bit more carefully, but I suspect the total government loan to any individual under my proposal could be much higher than it is now.


Washington, D.C.: Where did person A and B go to grad school because I want to go there!; Realistically, I think you are missing a HUGE point- most students aren't only $25,000 in debt after grad or law school, they're usually well over $100,000 in debt like the above poster and soon myself as well. The cost of higher education is disgusting and perhaps it's beyond time to look at how other countries keep their higher education costs so low for their students.

Robert Reich: You're right, of course. Many debts are much larger than $25,000. I used the $25,000 as a simple example -- but the point I was making still holds even if the debt is in excess of $100,000. And yes, the cost of higher education is way too high -- even given the fact that the average person with a grad-school degree earns more money during his or her career than the average person with only an undergrad degree. Other nations have tried a variety of mechanisms to keep costs down -- but most other advanced economies have governments that are willing to foot more of the education bill than is the U.S. government.


Rockville, Md.: Also, how would this program take into account layoffs and brief periods of unemployment. The system is based on those paying back a portion of their income. I think it will be very hard for this program to sustain itself.

Robert Reich: Some allowance could be made for brief periods of unemployment. The point is that a debtor would have to provide the set percentage (I'm using 3 percent as an example) of earnings for the first set number of years of full-time employment (I'm using 10 years as my example.)


Oakton, Va.: Would your program allow someone to accelerate their loan repayments? Not all of us are comfortable with paying back debt for decades. How would interest rate fluctuations be factored in?

Robert Reich: In my proposal, you'd pay back the set percentage (3 percent) for the first ten years of full-time employment. Nothing after that. Interest fluctuations would have nothing to do with it.


Arlington, Va.: Thanks for doing this chat!;

One assumption that this proposal seems to make is that most post-graduate lower-paying jobs have a social benefit that is higher than their pay scale. Obviously, this is true in many cases, like teaching and public-interest law. However, there are lots of low-paying and fulfilling jobs whose social value is not so obvious. Some might be related to a graduate degree (e.g. careers in the fine arts--I am not against society helping subsizide some art, but it's not clear that subsizing student loans in the fine arts is the best way to go about it), and others might not (e.g. following up a law degree with a career as a beach bum.) Another obvious question is how such a program would treat graduates who choose to stay-at-home parent rather than work at a paying job at some point during the repayment period. Do you have any thoughts on how to make the "low salary suggests social good" scale a little less crude?

Thanks!; I love your Marketplace commentaries, by the way.

Robert Reich: Let's assume these categories of people:

1. Some want to graduate and get the highest-paying job they can get.
2. Some want to graduate and get a job that they love, even if it pays relatively low wages.
3. Some want a job they love that has palpable social benefits as well (teacher, social worker, public-service lawyer, etc.)
4. Some want to be bums.

Under my plan, people in the first group would be subsidizing people in the other groups. Remember, though, no one would be forced to take a government-subsidized loan in the first place; even people in the first group get a good deal from the subsidized loan.

The public gets a good deal from people in the third group, but doesn't necessarily get a great deal from people in the second group, and certainly doesn't get a good deal from people in the last group.

But there's also a good in enabling young people to do what they love, jobs for which they have a passion, even if the social good is not all that clear. Hence, I think we should respond to young people in the second group.

And as to the last group -- well, there will always be those. Remember, a college education is itself a rare public resource, subsidized by the public in all kinds of ways over and above government-subsidized loans. There will always be a few, sadly, who use this privilege and don't do anything with it.


Columbia, Md.: Michelle,
This idea sounds nice for those in the low paying fields but I find it highly unlikely that the high paid lawyer or engineer is willing to pay for the teacher's education. Tuition is tuition, I should not have to pay double that of my lower paid friends because I make twice as much. We all make choices in life and whether we want to incur debt is one of them.
Just my two cents worth.

Robert Reich: Remember, you don't have to take the government-guaranteed loan in the first place! And if you do, and if you go into a high-paying field and end up subsidizing those in a lower-paying field, the government-guaranteed loan still gives you a great deal.


Arlington, Va.: A couple of questions about specifics. Do you see the percentages being tied to the number of years spent in school? There are many one year programs but PhDs can drag out to six (or longer!;) For those who do not finish their programs, would they be responsible for the dollar amount or held to the same percentage standard as others? How about those who default?

This is a really interesting idea - I hope it comes to fruition.

Robert Reich: Percentages could, of course, be tied to the number of years in school, regardless of whether a program is finished. As to default, it's the same problem under the current government-subsidized loan system -- a small percentage will default, sadly.


Washington, D.C.: What benefit would private lenders get from participating in this system? And what would be the benefit of using private lenders to provide the original loans instead of letting the federal government provide the loans?

Robert Reich: Private lenders would be treated exactly as they are now under the government's loan-guarantee system. When the government guarantees the loan, the risk is that much lower. The only added administrative task for the government is to manage the total pool of repayments and set the rates (fixed percentage per year, and duration of payback)so that every cohort is likely to keep the pool flush.

I've got to go now -- but thanks to everyone who participated. Hope you enjoyed it. I did.

Robert Reich


Michelle Singletary: Well folks that's it. Thank you all for joining me today. What a lively discussion. And I'm sorry if we didn't get to your question. There were just so many. Clearly this is an issue that needs further discussion, debate and even possible legislation. Again, if you like Robert Reich's idea tell your congressional representatives.

I want to thank Mr. Reich for joining me today.

As always, keep coming back. I have some great online discussions planned for this year. For example, next month I'm going to be hitting hard the topic of couples and money.

I so enjoy our meeting this way. So please come again.


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