College Loan Deal: Worse Than You Think

Bryan’s post, and the article it quotes, are understating the problem with Obama’s scheme, thanks to the magic of compound interest.  Let’s take little Suzy with her $212,000.  She takes a job at some appropriately socially-oriented inner-city public-service social worker position, and as a result only has 14,110  per year; we take 10 percent of that as her annual payment.  Current student loans are apparently at 8 percent.  So, her first year, she pays $1,411 against her loan — which cost $16,960 in interest. That’s about $15,549 over her payments.

Under the current terms of these loans, that excess is added to the principal. So, next year, we’re talking about the $212,000 principal, plus$15,549 added.  This is what people in the subprime mortgage business called “reverse amortization”.  Using the wonders of technology, I put that in a spreadsheet (see below).  The outcome is that really, when the loan is forgiven after 20 years, the total loss to the Government is $923,553, which is, not to put too fine a point on it, almost a million dollars!

Spreadsheet: