McGuigan: Remedial math for Education Secretary

Late last year the editorial board of The Wall Street Journal became involved in a little spat over education policy with U.S. Secretary of Education Arne Duncan. While the policy debate itself is worthy, the bigger story is our poor understanding of basic math.

To summarize the policy at issue: Congress has authorized Income-Based Repayments (IBR) for future student loans. Under this program, a student's loan payment will be capped by the income she earns each year. If a loan balance remains after 20 years of payments, that balance will be forgiven.

The editors expressed concern that capping loan repayments and forgiving debt will distort the decisions students make when selecting careers and colleges. For example, if a student wants to become a teacher, he won't have to be so concerned about selecting a more expensive school rather than a less expensive one because his payments will be capped and his loans forgiven. The cost of the forgiven loan will be borne by taxpayers.

In his letter responding to the editors, the Secretary of Education stated, "To qualify for a loan discharge, a borrower has to have a low-paying job relative to his debt for 20 years, all the while making on-time payments every month, every year. After 20 years, the average borrower will have paid 20 percent more than their original loan. At that point, the only thing we are forgiving is some of the remaining interest payments."

The phrase "the only thing" raised a red flag for me, so I looked to see what that really meant. Let's assume a student borrows $50,000 at 5 percent interest. Using Duncan's assumptions, she will have paid back the $50,000 plus "20 percent more," or an additional $10,000 in interest. What does simple arithmetic tell us about the remaining amount due? It is a whopping $32,874. In truth, the student will barely have reduced the loan principal.

Two lessons apply from this exchange. First, policies regarding education funding are worthy of debate, but it is essential that an assessment of costs and benefits be presented clearly. Second, we need better math education for anyone who bought into this line of reasoning.

TOM MCGUIGAN IS A CERTIFIED FINANCIAL PLANNER™ PROFESSIONAL AT BURNS ADVISORY GROUP/EXECUTIVE FINANCIAL GROUP, 187-B BOSTON POST ROAD, OLD LYME. CONTACT HIM AT (860) 434-5999 OR TMCGUIGAN@BURNSAG.COM

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