Mike Meru Has $1 Million in Student Loans. How Did That Happen?
Mike Meru,
the orthodontist in the WSJ story, who earns more than $255,000 a year, owns a $400,000 house and drives a Tesla pays only $1,589.97 a month on his student loans. In 25 years, his remaining balance, projected to exceed $2 million given accumulating interest, will be forgiven. The combination of unlimited borrowing and generous repayment plans produces a windfall for both USC and large borrowers.
In Dr. Meru’s case, the federal government paid USC tuition of $601,506 for his education, but he will only pay back only $414,900 in present value before his debt is discharged.[1] (Present value is the value today of a stream of future payments given an interest rate. Because most of Mr. Meru’s payments occur far in the future, comparison of his future repayments to the tuition paid to USC requires using the present value.)
The fact that federal government is paying USC far in excess of what it is going to get back from the borrower illustrates the problem with letting graduate students and parents borrow unlimited amounts while discharging residual debt in the future.
In this case, USC (with an endowment of $5 billion) has no incentive to keep its costs down. It could have charged the student an even higher amount and it would not have affected the borrower’s annual payments or the total amount he paid. When William Bennett, then secretary of education, said in 1987 that “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase”—this is exactly what he was talking about.
The borrower does well, too. Despite earning $225,000 each year—and almost $5 million (again, in net present value) over the course of his loan payments—Dr. Meru will pay back only $414,900 on a $601,506 degree. Because the balance of the loan is going to be forgiven, neither he nor the school cares whether tuition is too high or whether to rack up a bit more interest delaying repayment.
So who loses? The obvious one is the American taxpayer because the shortfall must come out of the federal budget. Indeed, for “consolidated” loans like Dr. Meru’s, the Department of Education assumed it will lose $28.70 on each $100 in debt enrolled in income-driven repayment plans. But the less obvious victims are other federal aid recipients. Historically, Congress has worked to contain the overall cost of the student loan program, in part using repayments of principal plus interest to offset any losses from low-interest, defaulted, unpaid, or forgiven loans. In that system, the higher interest rates and stronger performance of graduate loans helped offset costs of subsidized loans to low-income undergraduates. That could be unwinding.
https://www.brookings.edu/blog/up-f...ebt-spells-trouble-for-federal-loan-programs/
