Cutter Family Finances: 'Free' College Loans? Nope . . . You Pay!

Jeffrey CutterRichard Maclone Photography - Jeffrey Cutter

Decisions have consequences. Some things just don’t work out the way we plan.

Who has heard of the Income-Based Repayment (IBR) plan the US government has implemented for federal student loans? The truth is: not many. More than 12 percent of student loan borrowers are defaulting, even while there are other options—such as Income-Based Repayment—available to them. And while IBR can help many struggling graduates, it is quickly becoming a big burden for American taxpayers.

Both IBR and the similar Pay-As-You-Earn program allow qualifying borrowers to cap their monthly federal student loan repayments at 10 or 15 percent of their discretionary income. If payments are made under one of the programs, and certain other requirements are met, then after 20 or 25 years, depending on the program, the remaining balance of a borrower’s loan is forgiven. And for those who go into government or nonprofit work, the deal is even sweeter; loans need only be repaid for 10 years before they are forgiven.

Uncle Sam guarantees these loans that are eventually forgiven, which actually means that we, the taxpayers, pay any remaining loan balance. It’s only forgiven from the standpoint of the borrower. Good for the student; bad for the taxpayer.

The IBR program started in 2009 and is available to both undergraduate and graduate students. And although some may benefit from this program, it has created some unintended consequences. For example, the subsidization of education costs has enriched educational institutions—since it is expected that students’ federal loans may be forgiven, universities have managed to get away with increasing education costs to exorbitant rates.

Additionally, programs have increased competition for public jobs, and have influenced people to stay in them longer than they normally would.

Hmmm . . . in effect could IBR be replacing pensions?

Pensions in the private sector have been shrinking for decades. So for many years the draw of public employment was the benefits, including the pensions, which compensated for lower wages than could be earned in the private sector. But private sector wages have been either stagnant or have fallen since 2000, while public sector salaries only became stagnant after the financial crisis of 2008. As a result, public employment became just as attractive, or even more appealing to many, than private employment.

However, public pensions, which have been the cornerstone of public employment packages for decades, are also being reduced or eliminated in favor of 401(k)-type programs. This could result in a so-called rebalancing of the public sector/private sector work force. However, now that these federal loan repayment plans are available, there will be an extraordinary number of graduates interested in public sector work going forward, so they can make the most of the IBR program. Sure, this program is available to graduates who enter either the public or the private sector, but the shorter repayment period in public employment makes public employment much more attractive. Who wouldn’t want to cut their debt payment schedule by a decade, right?

And, not only will new grads be looking for public sector work, but they will stay in such jobs longer, just to keep this incredible benefit. This will slow the public employment turnover rate and keep these workers from whatever their normal progression would have been into the private sector. Interestingly, this is a net positive for public employers, because it creates more competition for their open positions, and it’s the result of a benefit for which the employer does not need to pay. However, this is not necessarily a positive consequence for our economy. It’s important to remember that a private-sector job and a public-sector job are not the same thing. I’m not saying public-sector jobs aren’t important, I truly believe they are. But a private-sector job pays for itself. A private-sector job creates other jobs, while a public-sector job is paid for by taxpayers. You see my point here? It is imperative that the private sector be able to attract and retain those highly educated individuals.
Look, IBR is in the news right now because the current administration wants to expand the program. Today, there are 1.63 million participants. New regulations would give the 5 million borrowers who took out student federal loans before 2007 eligibility to participate. This is in addition to all the students who are currently enrolled who are racking up debt at a record pace. They too will be able to use public employment to make their repayment period as short as possible, thereby shifting their debt to the American taxpayer.

So the next time you visit the Department of Motor Vehicles, if you encounter young workers who seem exceptionally bright, competent, and motivated, you don’t have to wonder why they’re there. It’s because they now have you paying for their student loans.

Be vigilant and stay alert, because you deserve more.

Jeffrey Cutter, CPA, PFS is the managing partner from Cutter Financial Group, LLC (, which provides private wealth and investment management through low risk, low volatility successful strategies. He can be reached at

Investment advice is offered by Horter Investment Management, LLC, a Registered Investment Adviser. Insurance and annuity products are sold separately through Cutter Financial Group, LLC. Securities transactions for Horter Investment Management clients are placed through Pershing Advisor Solutions, Trust Company of America, Jefferson National Monument Advisor, Fidelity, Security Benefit Life, FC Stone, and Wells Fargo Bank, N.A.

This column sponsored by:

Cutter Financial Group, LLC, a family owned and operated company, was founded by retirement and investment specialists. We engage high quality, independent wealth managers who specialize in significantly reducing risk during times of volatility, while capturing a large majority of the gains of the upside. This strategy allows our clients to secure a better, and worry-free, retirement.

Learn for about Cutter Financial Group on their website


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  • gwyson

    Uh, no. No one in their right mind would take a public service job just to get their student loans paid. First, you have to pay the loan for 10 years straight, so half of it (at least) is paid off. Then you have to be making a very small salary to even get considered for the program - I believe it's in the range of 50,000 or less. Once you've qualified for the program and can document that you've paid for 10 years without an issue, you may get a loan forgiveness for the remainder. There are certain public employers who qualify, some don't. So what do you get for that tremendous largesse? A job generally paying between 35000 to 50000 a year. Hummmm. The math looks like this: Private job making $100,000 x 20 years = 2456543.51 +- Public job making $50,000 x 20 years = 1228125.10 +- Subtract the (using a high range) 50,000 from the private job to pay for the tuition forgiveness and the private worker is still ahead 1178418.50. Not bad. And the premise that public service jobs don't create jobs is also incorrect. Teachers prepare the students who take those private industry jobs. The job wouldn't exist if no one could fill it. Police protect the public. They make sure that the private industry citizen can get to work safely. The DPW makes sure roads are passable and private industry workers can make it to work. Public workers are also consumers. Their money buys the products that your private industry makes - creating jobs. Perhaps rather than bashing those who take public service jobs you might better serve us all by fighting for transparency in the financial industry. THAT would be real eye opener for the public.