The CP Blog


All Debt is Not the Same

My old college roommate, Carl, called me the other day. After the usual catch-up on kids and creaky knees he sheepishly admitted that he was over his head in credit card debt. In fact, he owes about $28,000 in plastic. He accumulated this debt not by acquiring gadgets and goodies, or taking lavish vacations, but by starting a new business; you know, entrepreneurship for a brighter, more prosperous future. So far his business isn’t doing too well and he has to borrow more just to make minimum payments on all the debt. Says he feels like the hood ornament for the entire national consumer debt disaster.

When I heard his plight a light bulb went off in my head. I suggested he make a proposal to his creditors they wouldn’t be able to refuse.

The next day I went with Carl to his bank for moral support. An impatient trainee looked across the desk at us. “So, here’s what we should do,” Carl said with one of those door-to-door Jehovah’s Witness smiles. “Instead of slicing off a piece of my arm and leg every month for you, why don’t we just figure out what my discretionary income is and I’ll send you 10% of it.” The New Kid seemed puzzled. My buddy explained how to calculate discretionary income using a formula he’d found on a liberal leaning website called Fox Business: The Power to Prosper. “Basically, we take my annual gross income and subtract federal and state taxes, then subtract Medicaid and Social Security deductions, and whatever is left is my disposable income.” The New Kid furrowed his bushy brow and nodded – well, it was more of a frown actually. “You want to give me 10% of that?” “Heck no,” Carl said. “I’d starve. Stay with me, son.” He licked his pencil tip with a flourish and continued. “Next we subtract my mortgage payment, utilities, car payment, food, gas, maintenance, health insurance, car insurance, my 401K contribution, and childcare.” The number at the bottom under the column of expenses where it said Total was pretty puny. “That’s my discretionary income. You can have 10% of that divided into 12 equal payments.” The New Kid looked like Carl had just pulled a dead rabbit out of his faded John Deere tractor hat. “Is this supposed to be some kinda joke?” “No joke,” said Carl. “I promise to make all my payments for twenty years, and every year we’ll sit down and figure out my discretionary income just like today, and adjust the payments. At the end of twenty years if there’s a balance your bank will forgive it all and I’ll be scott-free.” With that the New Kid choked on his Red Bull and did a real life “I Love Lucy” spit take all over his desk. He was resisting enlightenment. As he mopped up the mess he said sarcastically, “You probably want us to pay the interest if your crappy little payment doesn’t cover it, and not add any interest if you have a financial hardship too.” “My goodness, you catch on fast, young man. Ain’t it a great deal?”

He sat down, popped a couple of Adderall, and puckered his mouth into a persimmon sneer. “You act like you’re doing us some kind of public service, old man.” Carl and I shared a knowing chuckle. That’s when Carl told him about his John F. Kennedy epiphany. He explained that he was planning to do stuff for the good of the country like maybe teach public school or join the fire department or become a cop. “Those people never make any money,” the New Kid scoffed. He was right. So Carl told him that under his proposal if he chose a career of public service the bank would agree to forgive Carl’s debt after ten years as long as he made all his payments; “I call it Public Service Loan Forgiveness. It’s win – win for everybody.

“Preposterous! No lender would ever agree to that!”

He was right. Carl was sunk. No credit card company would ever agree to that proposal. But the New Kid was wrong that no lender would agree. If only Carl had gone back to college and borrowed $28,000 in Direct Loans to train for his new business. The federal government has agreed to everything in Carl’s proposal for college graduates whose federal student loan debt is disproportionately high relative to income. This includes all Direct Loans, Stafford Loans, and FFEL loans. Average student loan debt these days for a graduate with a Bachelors degree is about $28,000. But you don’t have to live on a diet of Ramen Noodles for years to make the payments. Depending on your career and ability to pay you may not even have to pay it all back. Find out more about Income Based Repayment (IBR), the Pay as You Earn Plan, and the Public Service Loan Forgiveness Program at: