Maybe you read the story of Josh Mitchell about Mike Meru in the Wall Street Journal, who took out $600,000 in student loans to go to the University of Southern California dental school. Meru now owes $1 million of student loan debt because of fees and accrued interest.
How did Dr. Meru do that? Not too bad indeed. He’s now earning $225,000 a year as a dentist. He entered an income-based repayment plan (IBR), which set at only $1,590 a month for his monthly payments. If he makes regular payments for 25 years, he will be forgiven for the unpaid balance on his loans.
Before we delve in Dr. Meru $1 million mountain of school debt, we need to establish some facts. Dr Mike Meru is a 38-year old, mild mannered Orthodontist practicing in the State of Utah. He earns more than $255,000 a year, owns a $400,000 house and drives a Tesla.
He graduated from the University of Southern California as a dental school graduate. Once he had graduated, he found out he was to pay $1 million in student debt, and he will be doing this for at least the next 25 years.
Dr Mike Meru made headlines in late 2018 when the Wall Street Journal reported about his rare financial situation. Since the WSJ article, Dr Mike Meru has become somewhat of a legend- with people from Dave Ramseyto Jaspreet Singh and more talking about him.
How Did His Debt Accumulate That Much?
In the case of Dr. Meru Student Loan Debt, 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. (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.
Is Dr. Meru really going to have to pay back $1 million to $2 million?
The answer is almost certainly no. Due to US federal law, Dr Meru will only have to pay down on his debt until it is over 25 years old. Once it is older than 25 years, it will be wiped from his record, and he’ll never have to pay it back.
But even if he is forced to pay the whole balance back, he will be unlikely to do so. Not only will Dr Meru’s debt continue to accumulate interest, it probably wouldn’t come anywhere close to the $1-$2 million. Dr Meru will likely only pay back $414,900 in present value before his debt is discharged.
Even if Dr Meru is forced to pay the rest, which is highly unlikely anyway, he will probably only get to paying another $100,000 before he retires.
Lessons Drawn From Dr. Meru’s Case
First, income-based repayment programs are insane because student debtors make payments based on their income, not the amount they owe. Dr. Meru’s payments are set at $1,590 a month regardless of whether he borrowed $100,000, $200,000 or $600,000. Thus, IBRs operate as a perverse incentive for students to borrow as much as they can, because borrowing more money doesn’t raise the amount of their monthly payments.
Second, IBRs allow professional schools to raise tuition year after year without restraint because students simply borrow more money to cover the increased cost. USC told Mr. Meru that dental school would cost him about $400,000, but USC increased its tuition at least twice while Meru was in school; and Meru wound up borrowing $600,000 to finish his degree–far more than he had planned for.
Thirdly, the student loan program is destroying the integrity of professional education. The federal student loan program has allowed second- and third-tier law schools to jack up tuition rates, causing graduates to leave school with enormous debt and little prospect of landing good jobs.
A medical-school education now costs so much that graduates are forced to choose the most lucrative sectors of the medical field in order to pay off their student loans. That is why more and more general practitioners are foreign born and received their medical training overseas, where people don’t have to borrow a bunch of money to get an education.
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