Michigan’s SMART Program Could Ease Student Loan Crisis in State
Last week, Democratic Michigan lawmakers proposed sweeping legislation to prevent future college students from getting neck deep in student loan debt. Currently, Michigan graduates have the tenth highest college debt that averages $28,840 per grad according to the Project on Student Debt. 62% of Michigan’s college graduates come out of school owing student loans, but, if it passes, Senate Bill 784 would change all that.
SB 784 is a pay it forward type plan that would grant students interest-free loans for college in exchange for an agreement to pay back a set percentage of future earnings for up to 25 years after graduation. The percentage and term would depend on whether the student attended community college or a regular four year university. Rhode Island, Pennsylvania and Oregon have proposed similar programs.
The sponsoring lawmakers are pushing for a $2 million pilot program that would fund the education of 200 students. For each year funded, the student would commit to five years of repayment. The maximum years of education that would be funded is five, setting the maximum repayment period at 25 years. Graduates must be earning in excess of the federal poverty line to trigger repayment.
Repayments would equal 4% of salary for four-year university grads and 2% for community college graduates. Other caveats are that students participating must maintain a GPA of 2.5 or better and family income must be $250,000 or less. So, is this a good deal or not? Like we’re wont to do, we’ve crunched some numbers to compare this program against traditional student loans.
This proposal truly is a numbers game. See the scenario above – if you borrowed the full cost of tuition and fees at the average Michigan state university and you have a starting salary of $45,000 or less, you will come out ahead with the proposed plan. But if you borrow less – see the scenario below – you’ll end up paying out far more than you would had you taken out a traditional student loan.
What we can see is if you borrow the maximum and earn little, you’ll be well served by the plan. But the more you earn, the less beneficial this plan becomes. In all, this is a good idea, but because it’s structured in inflexible terms, it will only be beneficial to a select few. Essentially, you have to look at how much your prospective earnings are to see if this is a better program for your individual circumstances. What’s good about this program is that it means that states are taking the student loan crisis seriously, even if the federal government doesn’t seem to be.
This plan doesn’t seem practical except for a narrow group of potential borrowers, so we think they should go back to the drawing board. If the repayment, for instance, capped at the amount borrowed plus a certain percentage, this would be a more feasible plan. With a change like this that would protect higher earners and encourage them to participate, this plan could effectively self-fund and serve students better than traditional student loans without taking advantage and raking in excessive profits.
This plan also differs from another Michigan measured aimed at student loan relief proposed last year – House Bill 4182 – that would offer state income tax credits for residents’ student loan payments. That legislation petered out, but would have been of great benefit to those already in student loan debt, while this current measure only addresses future student loans.
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