Wednesday, January 22, 2014

Student Loans or Health Insurance?

The logic of the new healthcare law is that "young invincibles" have a patriotic duty to pay for older or sicker Americans.  The idea is that people with lower risks should pay higher premiums as long as we offer subsidies (or Medicaid) for people who really can't afford insurance. There may be more of a problem with this reasoning than we recognize--due to the new dynamics of student debt.

Here's the bottom line: the new law computes subsidies based on income, not discretionary income. For a lot of young graduates, that turns out to be a big problem. If you like math, read on. 

Professor Glenn Reynolds of Instapundit has been writing about the "higher education bubble" for some time now. This somewhat-controversial hypothesis claims that the value of a college degree is going down even as the cost of a degree is going up, and that the entire system of higher education in the United States is due for a "correction," much like the housing market bubble that popped in 2007.

Whether the "bubble" is sound economic theory or not, it focuses attention on how school debt burdens young people in an underperforming economy. A recent graduate who borrowed $50,000 for her BA in sociology may find nothing better than Starbucks--unless she's willing to borrow even more to get a masters degree.

Student debt is different from mortgage debt--and every difference disadvantages younger people. Student loans are paid out of after-tax dollars; home loans are paid from pre-tax dollars. Home loans vanish after bankruptcy, student loans stay with you until you die.

So let's put these facts together and see how they apply to the "young invincibles" who are supposed to sign up on the exchanges. A 26-year-old who makes 29,000 in Frederick, Maryland pays $168.00 per month for a "silver" plan, which has a $1,300 deductible and a $6,350 out-of-pocket maximum. A ten year loan for $50,000 at 6.8% costs $575 per month. Rent for a single person in Frederick is over $600 a month. Federal income tax on a person with no dependents or deductions is over $200 per month. Adding it up, we get:
  • Income: $29,000
  • Fixed Expenses: $21,600
    • Federal taxes: $2,400
    • Rent: $7,200
    • Student loan: $6,900
    • Insurance: $2000
    • Car loan (4 years on $5000): $1500
    • Cell phone (basic plan): $600
  • Living Expenses: $2800
    • Food ($100 a month for basics): $1200
    • Gas (40 miles per day at 22 mpg): $1600
  • Discretionary income: $5600
That is less than $500 per month--and doesn't include little items like state taxes, car repairs, clothes, and the like.

What if this particular graduate is one of those "young invincibles" that the law depends upon?  We have to add a few items:
  • Young invincible expenses:
    • Fast food
    • Beer
    • Sports
    • Cable television
    • A real car
    • Etc.
 Of course, not all young men need fast cars or six six-packs to get through the week. I go to church with some remarkable young men who are saving up to get married and start a family. After paying their tithe (which gets them no tax advantages, since it falls within the "standard deduction"), these men have a total of $2700 they can save each year for an engagement ring and honeymoon--assuming they can find a girl who will say "yes" when their date budget only covers sandwiches on a park bench.

All that is for a student loan of $50,000 for a graduate with a pretty good job. What about the graduate in the next cubicle with the same salary and a $75,000 loan? His interest payment is just about $3600 more each year, leaving him with less than $200 a month after basic food and gas.

Bottom line? The new law wasn't written by a recent graduate, and things may get worse before they get better. The kind of job you need to pay off the kind of debt you need to get the kind of job you need is too high for subsidies but too low to get ahead in life. And don't forget--this lifestyle of "unsubsidized subsistence" is considered success for the recent graduate.

Is it any wonder that "millenials" aren't excited about the new healthcare law?

1 comment:

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