No compromise on student loans

Interest rates on federally subsidized student loans double today from 3.4 percent to 6.8 percent. The Democratic Senate leadership blew it by rejecting a sensible bipartisan compromise, writes Matthew Chingos of the Brookings Institution.

The new proposal, from a group of senators including three Republicans, two Democrats, and one Independent, offers a permanent fix to the now-annual problem of Congressional meddling with interest rates by instead tying rates to the market.

The bipartisan compromise would fix the interest rate for the life of the loan, so there’d be no surprises for borrowers. It also cuts rates on unsubsidized loans used by students from middle-class families. “By charging higher rates to graduate students and on the PLUS loan program for parents, the overall plan is close to budget-neutral according to the Congressional Budget Office,” Chingos writes.

Massachusetts Sen. Elizabeth Warren has proposed letting students pay 0.75 percent interest,  “the same ultra-low rate that banks currently get on short-term loans from the Federal Reserve,” notes Glenn Harlan Reynolds in the Wall Street Journal. Linking interest rates to the market rate is “immoral,” Warren said, rejecting an earlier Republican proposal. What’s Really ‘Immoral’ About Student Loans is not “the still historically low interest rates, but in the principal of the thing,” writes Reynolds, a University of Tennessee law professor who blogs as Instapundit.

Student debt, which recently surpassed the trillion-dollar level in the U.S., is now a major burden on graduates, a burden that is often not offset by increased earnings from a college degree in say, race and gender issues, rather than engineering.

According to an extensive 2012 analysis by the Associated Press of college graduates 25 and younger, 50% are either unemployed or in jobs that don’t require a college degree. Then there are the large numbers who don’t graduate at all. According to the National Student Clearinghouse Research Center, more than 40% of full-time students at four-year institutions fail to graduate within six years.

. . . According to a recent study by the New York Federal Reserve, “the share of twenty-five-year-olds with student debt has increased from just 25 percent in 2003 to 43 percent in 2012″ and “student loan delinquencies have also been growing.”

Colleges have continued to raise tuition — and add administrators — because subsidized student loans have made it possible to get away with it, writes Reynolds, author of The Higher Education Bubble. They can accept students with little chance of earning a degree or finding “gainful employment” and collect the loan money up front. “If students are unable to pay the loans back, the burden falls on taxpayers (if the loan was “guaranteed” by the federal government), and the students themselves, while the schools get off scot-free.”

A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. I would favor allowing students who can’t pay to discharge their loan balances in bankruptcy after a reasonable time—say, five to seven years, maybe even 10—with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance.

“Universities would be much more careful about encouraging students to take on significant debt unless they are fully committed first to graduating, and second to a realistic career path that would enable them to service that debt over time,” Reynolds predicts.

But this goes against federal policy, which calls for all students — including those with little chance of earning a degree — to try college.

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Comments

  1. Wait…I thought Obama promised he wouldn’t raise interest rates on student loans. Isn’t that what this was about? http://www.huffingtonpost.com/rich-williams/student-loan-rates_b_1452658.html

    I mean, I chanted with the President and everything. You mean he was lying? Wha…?

  2. I wish the government would get out of the student loan business. Of course, they should also allow/expect private lenders to use due diligence; kids with SAT/ACT scores not indicating college readiness and kids wanting to study art history, XYZ studies, sociology etc. could be – and should be – refused loans. Some things shouldn’t be taxpayer-funded. I’d say the same for government grants (Stafford etc). Doing this, with large amounts of publicity to counselors, students and parents, might get more kids to work harder. Fewer kids would be saddled with college debt and poor prospects for repaying it, too.

  3. Crimson Wife says:

    So Elizabeth Warren thinks that middle-class taxpayers should heavily subsidize the student loans of future investment bankers, corporate lawyers, specialist physicians, and other “one percenters”?

    I have no problem with subsidizing the student loan interest rate for undergraduates and also grad students in fields that do not typically pay six figure salaries (teachers, social workers, ministers, etc.) But those who can afford to pay market rates should.

    • Mike in Texas says:

      Why not? We subsidize corporations and oil companies.

      • Don’t worry Mike. Any day now the workers of the world will rise up, throw off the chains of the capitalist exploiters and establish a righteous dictatorship of the proletariat. Then society will be based on that catchphrase of small minds, from each according to his ability, to each according to his need.

        Won’t that be glorious? Won’t that be simply scrumptious? All the meanies who don’t give you what you deserve will get their comeuppance and life will be just dreamy.

        Now go read some Howard Zinn or Noam Chomsky and go to bed.

        • Don’t be so hard on him, allen. We really shouldn’t be subsidizing corporations; of course, we shouldn’t be subsidizing education, either (federally speaking).

          • Hard on Mike? Me?

            No. I’m helping Mike overcome his reticence about the glorious world he envisions. Oh sure, that every single effort to advance that view has resulted in either ludicrous or horrifying failure is no reason to give up on the dream so Mike should cast aside that sneaking suspicion that he’s an anachronism and man the barricades.

            And as far as Mike’s complaints about subsidies goes, he’s upset that there are feeders at the government trough of which he does not approve. Mike’s not opposed to subsidies, he’s opposed to subsidies which are unacceptable to his elevated, moral sensibilities. For the causes that do appeal to what he believes to be an elevated moral sense subsidies aren’t just acceptable, they’re mandatory.

            Also, you’re right. Subsidies are inherently dangerous to a representative form of government and ought, like any dangerous force, to be avoided except at the extremity and maybe not even then. Too bad a representative form of government makes subsidies a certainty with the only questions being who gets how much.

  4. Crimson- a better way to subsidize would be loan forgiveness or grants once they were working in the field. At the point of origination, you don’t know where someone is going to end up.

    I think capping loan amounts would be another step in the right direction. When I went to college, my total undergrad loans were capped at about 11K for four years (subsidized loans.) The college made up the difference between that and what I could afford to pay. Now, you see kids graduating 100K in debt. If easy loans are available, colleges won’t give grants.

    • Graduating with 100K in debt pretty much means you’re never going to be able to afford a house, and many other things (unless your major is in a high demand field).

      The issue of student loans vs. value of a college degree is something that the nation as a whole needs to start addressing. Within a decade, the cost of higher education will pretty much price itself right out of the market (perhaps that’s a good thing?)

      Sigh

      • Exactly. With our small amounts of debt (My husband took out loans for grad school) we could still manage to buy a house when he got his first real job. (I’m home with the kids.) And when we moved, we could afford to buy a second house before selling the first.) We’re at 100K in debt now– because we own two houses and still have a few loans left— but starting OUT with that much debt? (Obviously, ours will decrease rapidly once we sell that dang house!)

  5. Not all that many students are graduating with these mountains of debt…

    http://www.theatlantic.com/business/archive/2012/05/the-student-debt-crisis-we-dont-talk-about/257146/

    What’s the right number who should? Probably 0; but how do you help these people and how much would it cost (because we haven’t managed universal literacy or numeracy very well; much less solved the college access question)?

    How much would we spend creating Deans of Financial Responsibility at every college campus to lead an army of debt counselors?

    Let’s put colleges on the hook, and cap what we’ll loan a student for a course of study. I’d like to see information about how colleges change financial aid packages over time – how much bait and switch is occurring (ie: wildly changing composition of aid packages from one year to the next).

    I forsee some marginal colleges going out of business no matter what. Tuition can’t continue to grow that much faster than inflation forever.

  6. Stacy in NJ says:

    We need to figure out why the rate of tuition inflation has out-paced CPI and even medical inflation. Oh, wait – we already know why. Too bad we’re not going to do anything about fixing it, though. That would require real concern for the poor and working-class and a thoughtful and careful response rather than some idiotic class-warfare nonsense drummed up to get votes from low information voters. Look! Caesar’s bloody toga! It’s just another passion play. Meanwhile lets encourage poorly prepared students to take out thousands of dollars in student loans when its unlikely they’ll even complete the degree. Let’s support a dysfunctional, inefficient, bloated, and corrupt university system on the backs of those students.

  7. Caralynn says:

    Thanks for your great article. It is about time that colleges and universities are held to higher standards concerning employability. It seems wrong to string students along with grand promises that employment is almost guaranteed with a degree in comparative literature, this or that “studies”, or sociology at 35k a year, when this is not the case. If these degrees are for self edification and not employment, please say so and not lie to inexperienced kids and their parents.