Obama, Romney confuse student loan issue

President Obama visited colleges and universities on a three-state tour promoting his proposal to keep the interest rate on new federal student loans at 3.4 percent, writes Matthew Chingos on the Brookings Institution’s Up Front Blog. The temporary rate reduction passed in 2007 is scheduled to end in July, which would return the rate to 6.8 percent.

Obama’s proposal — now endorsed by Romney — won’t help current college students, graduates or dropouts, writes Chingos.  It only applies to new loans.

President Obama asked University of North Carolina students, “Anybody here can afford to pay an extra $1,000 right now?” Nobody would. Subsidized loans accrue no interest until students leave college.

There is no doubt that many college students and their families are being squeezed by rising college costs. And there are good reasons for the federal government to provide financial assistance to help low-income students afford college. But charging below-market interest rates on student loans is an inefficient and likely ineffective way to encourage college enrollment and completion because students don’t pay any interest until after they leave college.

“If Obama and Romney want to buy the votes of struggling college students, they should at least propose the more efficient path of increasing the grants that students receive when they attend college, not decreasing the interest they pay after they leave,” Chingos writes.

Federal policy should prioritize grants for low-income students over tuition tax credits that benefit the affluent, argues Education Sector in a new report.

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Comments

  1. Any taxpayer-subsidized funding, whether loans or grants, should be restricted to those who have demonstrated on the SAT/ACT/APs (not including foreign language tests taken by native speakers) that they are prepared for college-level (no remedial classes) work. One could set different standards for CC vs. university, but remedial classes should be paid for by the student or private funding. Kids and parents need to know that kids need to work in k-12 if they want to continue their education beyond that and enabling years of drifting followed by remedial work – statistically unlikely to progress to a certificate or degree – is unfair to those who are paying the taxes. Given the generous nature of Americans, I’m sure there are organizations who would be willing to assist hard-working kids who have gaps left by poor schools make up such deficiencies quickly and progress to CC or university classes. Private entities can differentiate between such students and those who have made no effort; government cannot.

    • Sean Mays says:

      Interesting idea: No financial aid from the taxpayers until you’re in “college level courses”

      “Private entities can differentiate … government cannot.” More likely chooses not too, after all it leads to bigger bureaucracy and budgets! (cynical view) or because it leads to more disparate outcomes (progressive view?)

      “The Bureaucracy is expanding to meet the needs of the expanding Bureaucracy.”

  2. This whole conversation makes no sense to me. Government officials claim to want to help students afford a service to which government officials set the price, and which governments could provide (nearly) free. How much would it cost to publicize a reading list and to license Sylvan Learning Centers and the University of Phoenix to proctor and grade exams? Then the only remaining expense would be the cost of printing diplomas earned through examination. The US government operates five post-secondary schools: the Air Force Academy at Boulder, Colorado, the US Military academy at West Point, New York, the Naval Academy at Annapolis, Maryland, the Coast Guard Academy at New London, Connecticut, and the Merchant Marine Academy at Kings Point, New York. What is the barrier to virtual enrollment of one million students each and tuition of $0.00? Aside from opposition from the $100, 000/year faculty in the current system, I mean.

    • Well, there is the administration of the colleges. The boards of trustees. The alumni associations.

      Then there’s the expectations and assumptions of the broader society. The lack of cognizance of any alternatives.

      There are HR departments nation-wide who off-load their responsibility for distinguishing the ept from the inept on the colleges.

      But at least as important as a recounting of those who might be opposed to your idea is identifying those who’d find advantage in your idea. This is, after all, politics and if you can’t identify your interest groups who is it that’ll go out of their way to support the idea?

  3. Cranberry says:

    Allowing debtors to discharge student loan debts in bankruptcy is the only solution. The US government should not be encouraging students to become debt slaves. http://www.zerohedge.com/news/student-loan-debt-slaves-perpetuity-true-story-bankruptcy-hell

    • Sean Mays says:

      I find the case study interesting …

      $25,000 in federal loans and about $37,000 in private ones, much of it from taking required continuing education credits to keep up their teaching licenses …

      It says they paid for CE credits – It’s been my experience that many school districts have plenty of free CE classes; perhaps Sandusky doesn’t? It’s 6 credits over 5 years in Ohio, or 180 contact hours.

      As the article points out, dischargable debt is to protect the “honest, but unlucky” – students COULD choose differently, majors, going, not going; CC vs 4 year. Issuing total amnesty carte blanche just seems to invite the problem all over again.

      I’m thinking back to the sociology major from Northeastern who racked up nearly 200k in debt; that could probably have been managed better.

      I don’t think the student debt problem will go away as long as the govt is standing there handing out cash and exhorting everybody to go. It will continue to cause prices to rise faster than inflation and we’ll have an even greater percent of kids way underwater.

      As George points out – students are bad risks; bankruptcy discharge will drive up the costs of borrowing for all students. And if just the govt guarantees the loans, well; we’ve beat that enough on this blog.

  4. GEORGE LARSON says:

    If student loans could be discharged in bankruptcy only a fool would lend students money because a student will usually graduate with few assets and little cash.

    Since credit checks often go along with employment, would bankruptcy make the job search harder?

    • Cranberry says:

      Anyone who lends funds has a duty to practice due diligence. A large part of our current problems stems from lenders not practicing due diligence. They lent money to people who would never be able to repay the loan. They lent money to people THEY KNEW would never be able to repay the loan.

      Far too many college graduates and college dropouts will never be able to buy a house or start a family, because they can’t discharge their student debt. With compound interest, relatively minor sums can and do balloon out of all proportion to the original loan.

      The banks in our country have behaved like fools. We should not reward them for those practices. In commercial transactions, the bankers are much more sophisticated than the students who want to borrow money. I guarantee you, if they had skin in the game, they would quickly be able to predict a student’s chances of graduating and repaying a loan within, say, 20 years. The algorithms wouldn’t be difficult.

      However, you can make as much money out of a lifelong obligation from someone on food stamps as you can from a cardiologist who repays the loan on time, IF the risk of default has been taken out of the equation. Return that risk to the equation, as it was before 2005.

      • Sean Mays says:

        “The algorithms wouldn’t be difficult”

        Not terribly, no. You can bet big factors will be starting salary and expected lifetime earnings. Will we as a society be OK saying – sorry Janey, we won’t loan you the money to be a social worker; we’re giving it to Sarah who wants to be a petroleum engineer? We would loan you money to become a science teacher though, because we need some of those…

        Banks have behaved like fools? Yes, and they were actively encouraged by the government to DO it. The banks are regulated and the government is on a college for all kick. Goodness, the Wall Street Journal ran an alarmist piece on the front page yesterday how the US education deficit will stifle our economy. Apparently the concern is that the RATE of growth in educational attainment has slowed over the last 20 years; it’s not negative,the first derivative is positive; but it seems our prosperity requires the 2nd derivative to be positive as well.

        How about the people who acted like fools? Nobody thought, DANG; how AM I going to pay down this 100k I’ve borrowed to become a puppeteer?? People need skin in the game too; maybe we should have “student bankruptcy” that says OK – just pay the principal back and we’ll call it even.

      • Roger Sweeny says:

        There is absolutely no way anyone, bank or professor or government official, can predict a student’s 20-year earning profile. Nor can they predict an average.

        Bankers honestly believed–as did Senators, editorial writers, guidance counselors, and parents–that going to college would substantially increase almost any student’s lifetime earnings, more than enough to make up for the debt taken on.

        They were tragically wrong.

        Looking back, we say, “how could anyone have believed that?” but the fact is that almost everyone did. Similarly, we now say, “how could anyone have believed that housing prices would keep going up and up and up?” But most everyone did.

        Tyler Cowen is fond of saying, “we are not as rich as we think we are.” It is also true that we do not know nearly as much as we think we know. The great physicist Niels Bohr nailed it, “Prediction is very difficult, especially about the future.”

        (Yes, Yogi Berra said it later.)

        • Sean Mays says:

          It was pretty obvious that housing prices couldn’t keep going up and up like they had. Prices were increasing faster than wages, housing was taking more and more out of family budgets – something had to give; it was only a question of “when”. Greenspan’s Humphrey-Hawkins speaches discussed irrational exuberance and soft landing. He got the timing and magnitude wrong, but the warning was there. Reversion to the mean stinks.

          • Roger Sweeny says:

            Imagine that you were a financial adviser in 2001. You tell your clients that housing prices are unsustainably high and they should bet on prices falling. They take your advice and lose money. In 2002, you tell them that housing prices are even more above trend and they should bet on them to fall. They do and lose money again.

            You repeat your advice in 2003, 2004, 2005, and 2006. Each year your clients lose money and watch people following the opposite strategy make out like bandits.

            By 2007 you have lost all your clients. Which is too bad, because in that year housing prices start coming down.

            In a bubble, timing is everything. The person who looked like an idiot in 2006 looks like a prophet in 2008–and vice versa.

        • Cranberry says:

          There is absolutely no way anyone, bank or professor or government official, can predict a student’s 20-year earning profile.

          Nonsense. Really, that is nonsense. The insurance industry employs legions of mathematicians, i.e. actuaries, to determine mortality tables for longevity. Longevity is less predictable than academic outcomes.

          For any single student, they may not be precise, but for the group as a whole, yes, they can estimate the odds of a B- student with a 25 ACT finishing college.
          Or a C- student with a 900 SAT finishing college. They may be wrong with any particular individual, but they make their money by being correct for the pool as a whole.

          Bankers honestly believed–as did Senators, editorial writers, guidance counselors, and parents–that going to college would substantially increase almost any student’s lifetime earnings, more than enough to make up for the debt taken on.

          Bankers are not your friend. They are civilized loan sharks. They were not making loans from the goodness of their hearts, nor from their unbounded faith in humanity. There is no such thing as “good debt.” Doing away with the ability to discharge debt in bankruptcy creates the potential for life-long indebtedness.
          If your debtor cannot escape the obligation, you can even make more money from him over the long term than from a debtor who pays his debt off early.

          Similarly, we now say, “how could anyone have believed that housing prices would keep going up and up and up?” But most everyone did.

          Except for the 6,970 search results on Google, when you set parameters to news postings between 1/1/92 to 1/1/2008. If you add that the article must include the word “tulip,” the search engine has 42 results.

          Timing is everything. Many investors probably knew that it would end sometime, but hoped to get out in time.

          • Cranberry says:

            Google search term: “housing bubble.”

          • Roger Sweeny says:

            Average longevity is very predictable. It is the basis of the life insurance industry. Lifetime earnings are much, much less predictable–as we have been finding out in the last few years.

            Today people argue about what a college degree means in terms of earnings. Some say it means an average increase of a million dollars over a lifetime. Others say that’s b.s. It depends on the major. It depends on the college. It depends on where you intern, how you market yourself, etc. The fact that this disagreement is occurring indicates that lifetime earnings are not terribly predictable.

            Bankers make loans to make money for themselves. They make the most money when the loans are repaid with interest. They do not make money when the borrowers can’t repay–unless they can seize the collateral and sell it for more than the outstanding balance of the loan. Bankers in 2007 honestly believed that those no down payment no income verification loans would make money because even if the borrower defaulted, the home value would have gone up enough that the bank could sell the home and get everything they were owed. That had indeed been their experience up till that time.

            It was not their experience afterwards.

            I think you are right when you say, “Many investors probably knew that it would end sometime, but hoped to get out in time.” That’s what always happens in a bubble. Lots of people had made lots of money in previous years and most people figured it would keep going on for at least a while longer. But bubbles always pop. Alas, if you go back and look at the predictions, almost no one predicted when it would pop.

          • Sean Mays says:

            When we were kids, we called it Musical Chairs.

          • Cranberry says:

            @Roger Sweeney,

            They do not make money when the borrowers can’t repay–unless they can seize the collateral and sell it for more than the outstanding balance of the loan.

            As far as I know, in most states, mortgages are non-recourse. That means the underwater mortgage holder can walk away from the obligation. Yes, there will be consequences for his credit.

            Making student debt non-dischargeable means that student borrowers can’t default. They may not be able to pay the full sum, but the debt remains, and grows with time, due to accrued interest. That makes the debt a no-lose proposition. That’s what debt slavery means.

          • Roger Sweeny says:

            Yes, a bank can’t get more from a defaulted mortgage than what they can sell the house for. Which is why bankers require substantial down payments if they think the value of the collateral can go down.

            A student loan is potentially more lucrative if the principal and all the accrued interest actually gets paid. However, being legally obligated and actually making all the payments are two different things.

  5. GEORGE LARSON says:

    Cranberry

    I agree with you about the utility of actuaries, but they are not usually employed to determine interest rates on loans and determine credit worthiness. This was not part of the wikipedia entry. Do you know for sure an actuary can legally make this determination?

    I beleive they do determine lifetime earnings , but this is for people already employed in a job, not for a potential aspirant with no current income four or more years before employment.

    I recall the number of my classmates who started out in the sciences and ended up in a non science major was huge. Wouldn’t that would be a big monkey wrench in an actuarial table?

    • Cranberry says:

      An actuary determines the odds of someone dying. The financial industry makes rational bets every day on the risks and returns of all sorts of investments. In comparison to trying to determine the weather next year, (necessary for cattle and wheat futures), trying to determine the average salary for an engineering major isn’t that difficult.

      I don’t think major changes would be a big deal. If you think about it, colleges already do this. They know that a certain number of budding engineers will become history majors, and yet the number of engineering graduates remains relatively stable for any particular university.

      At any rate, there are high school students who do not have a rational chance of finishing college. There are also high school students who wish to pursue careers which don’t pay enough to allow them to pay off any student debt. Is it kind to them to allow them to take on more debt than they could ever be able to repay? Is it kind to them to allow them to take on private loans with uncapped, variable interest rates?

      • Sean Mays says:

        I’d like to see an analysis of WHY the private loan industry exists and who the customers are. Does it arise from families looking at their FAFSA and saying; no WAY we can crack that nut! Is it from independent or older students or more mainstream students? More marginal academically or super talented?

  6. Bill Leonard says:

    Unremarked in this discussion thus far: How much of the problem is in fact due to the incredible increases in tuition and related costs, such costs having skyrocketed precisely because the government made a large lake of loan money available?

  7. Sean Mays says:

    To ponder, as we put a “face” on debt slavery, consider some numbers:

    http://www.economist.com/blogs/dailychart/2011/10/us-consumer-spending

    http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdf

    Over half of people with private loans (which ARE scary!) haven’t maxed out their Federal Loans. We spend much more on eating out than on education. In the aggregate; your mileage may vary.

    • Cranberry says:

      “We spend much more on eating out than on education.”

      However, only 4% of the population attends college (roughly 12.8 mil. in a population of 311 mill.) Education outlays approach the amount spent for new cars and trucks–but by a much smaller percentage of the population. (I can’t tell if “education” spending includes all extant student loans, i.e., any loan which hasn’t been paid off, or the tuition colleges receive.)

      It’s interesting that public college attendees are less likely to take out private loans. It could be that those students had more sensible guidance, from parents or counselors, who were able to persuade them to take a good hard look at the numbers.

      Hard-headed, persuasive counseling in high school could make a huge difference for students’ later finances. Don’t take out a $5,000 loan at 18% interest to attend a college which may be only marginally better.