Gaming the Student Loan System

Some people are really proud of their college. They wear jerseys on game days, put stickers on their cars, even get tattoos.

I don’t go so far as all that.

My proclamation of support is wearing an old baseball cap when I do yard work or sail. It’s just like my last battered baseball cap, which now resides somewhere at the bottom of Tampa Bay, after being knocked off in a storm.

Still, once in a while someone will notice my hat and ask if I graduated from Georgetown University (GU), and I quickly respond: “Yes!” After all, everyone likes to belong to well-regarded institutions. We point to our school’s reputation for sports, academics, or whatever it is that makes the place standout.

Now my alma mater, or at least its law school, has developed a new way to stand out…

It has created an interesting way to game the student loan system.

Stirring up a witch’s brew, Georgetown Law concocted a scheme that merges three programs to create a blockbuster offering for students – free law school.

The first program is the graduate student-loan system that allows students to borrow every cent they need for tuition, fees, books, and living expenses. Everything! The U.S. government originates these student loans, as it does all student loans these days.

The second program is Income-Based Repayment for student loans. Under this plan a graduate who gets a government job (or almost any non-profit job) can opt to pay back a set percentage of his modest salary for 10 years. After that the government forgives what remains of his student loan.

The third program is how the university sets tuition, which is any way it wants.

This blockbuster combination requires students to borrow every nickel needed for school, to get a public service jobs after graduation and to apply for the 10-year Income-Based Repayment plan. At that point, GU Law commits to making all the student loan payments required. How would the school get the money needed to make the payments? By setting tuition a little higher on the front end, of course!

This program is a thing of beauty that creates winners all around… well, almost all around. There is one group that gets the short end of the stick.

Taxpayers.

Some altruistic billionaire doesn’t fund the Income-Based Repayment program. This brain child is an offering of our U.S. government, and presumably was meant to encourage people to join public service.

No matter what the motivation, the end result is obvious: Non-repayment of millions, if not billions, of dollars in student loans, with taxpayers picking up the bill.

And it gets better.

Many people have labeled Georgetown Law’s program as an abuse of the system, one that allows students to foist payment onto someone else. This is true, but it misses one of the most elegant parts of the scheme.

In the world of private industry – be it banking, health care, manufacturing or most anything else – one of the most frustrating elements is compliance with ever-changing government regulations.

To stay on the right side of the law, companies hire either in-house compliance specialists or consulting firms filled with bright young people who are knowledgeable about such things.

The absolute best person to have on your side when you’re trying to navigate regulation is a person who recently worked within the government, either setting or enforcing said regulation. Such people have intimate working knowledge of how the rules are enforced, what areas of the law are most important, and they even have personal relationships with staff members within the enforcement agencies.

There’s a price that companies pay for such people, and it’s high. It comes in the form of salaries and bonuses. People with firsthand knowledge of regulations are in high demand.

So a common career path for a bright, young lawyer is to work within a government agency for, say, 10 years, to gain invaluable knowledge and relationships, and then “flip” to the private sector to boost his pay by several hundred percent.

This is where the Georgetown Law program shines. It shows students how to get a free education, which even the school doesn’t pay for, and how to use their 10 years of government servitude to set themselves up for a lifetime of high earnings that kick in right after their student loans are forgiven.

Brilliant!

Given that Georgetown Law costs about $75,000 per year (including tuition, living expenses, etc.), the estimated cost of this program to taxpayers is $158,000 in forgiven debt per student.

And now other schools are jumping on the band wagon. Both Berkeley and Duke are pitching their own, similar programs.

While I recognize that this program is innovative and seeks to use available resources to their full advantage, I find it difficult to square this with any sense of fair play and the “spirit” of the programs involved instead of the actual letter of the law.

I think now when people ask if I attended Georgetown I’ll still answer yes, but I’ll quickly point out that it was for undergraduate study.

Rodney

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.