Last week the Obama administration proposed some changes to federal student loans. Momof3 and The Grand Inquisitor discuss the proposed changes.
MOM:
At just over $1 trillion dollars, federal and private student loans have surpassed credit card debt. This is a formidable tax burden on borrowers at a time where we have close to double digit unemployment and an even worse job market for those just graduating college.
- Federal Student loans will no longer be parceled out to private banks. Students applying for federal loans will get their checks directly from the Department of Education.
- Repayment of the loans will be capped at 10% of the debtor’s income and the remainder of the loan will be forgiven after 20 years. Currently the repayment is capped at 15% of income and loans are forgiven after 25 years, although few people know about that forgiveness.
- Those with multiple student loans from private at federal sources will be able to consolidate at reduced rates.
Sounds great, right? I think this makes great political sense, but really is not solving the problem at all. What’s the problem and the problems with this plan? Let’s tackle them one at a a time.
College is ridiculously expensive and tuition is increasing at a rate far greater than inflation. How great? Momof3 graduated high school in 1985 and I found this nifty chart which illustrates just how much it has increased since I graduated from Glenbard West High School:
When you look at this chart, you see that tuition remains near CPI inflation levels until 1992. What happened in 1992? There was a massive change in the Stafford Federal Student Loan program which made federal loans available to students without parental income restrictions. Some believe this massive influx of cash that was now available to colleges caused them to go on a path of tuition hikes and wild spending. Many colleges took this opportunity to expand what I would refer to as luxury services (as compared to when I went to college). Sushi bars, $50 million exercise facilities, art galleries, research facilities that do nothing to educate students but students are paying for via their tuition, etc.
Let’s now tackle the issue of the myth that education is priceless. It isn’t, it is an investment in your future. It often comes at great cost and one should consider the investment of your education as carefully as you invest in the stock market. Remember Kelli Space the Northeastern grad who had $200k in loans upon graduating and then begged people to help her out? After $200k in debt, she is now an office manager at an internet company in New York. What a crappy return on her investment so far.
However, with this Obama plan, education could be priceless because all can be forgiven after 20 years and it caps your repayment to 10% of your income. Those who choose lower-wage careers could loan themselves to the hilt and go to Princeton, Harvard and Stanford and their repayment would be a fraction of the actual cost. Parents would be foolish to dole out big bucks even if they could afford to do so. Rather, the smarter financial move would be to federally loan their kids out to the hilt and only payback that 10% of their kid’s salary for 20 years. Poof! You have just made an Ivy education affordable for someone who is choosing a lower wage career — like our girl Kelli Space. EDIT after reading GI’s comments: I’m using the Ivy example here to illustrate a poor college investment return rate on some careers. You can just as easily get 6-figure education debt by going to UCONN for undergrad and grad school, even with in-state tuition.
Another quibble Momof3 has with this plan is that it essentially makes the DoE one of the largest banks in the US. Given our government’s track record with Freddie and Fannie, I’m not sure this is a great idea despite predator loan practices by private banks. Additionally, these DoE loans will charge a usurious 6.8%. CRAZY given that federal borrowing for this program is at less than 1%.
The Grand Inquisitor:
Education costs have become an iron gate closing off economic security to many, many Americans. Everybody talks about the six-figure, private-school debt holder (and I am one of them), but the issue is much more acute for working poor families who can’t get an associates degree from a community college so they can improve their lot. Middle-class students have also been hit hard and can no longer afford tuition at formerly the affordable four year schools that used to be engine of American social mobility.
I wasn’t able to afford a college education until I was in my 30s, so I have seen how lack of access to education can impact your life and I also know that I am a lucky exception because most people like me never get access to higher education. This means they earn less, can’t afford things like adequate medical care, and can’t save to send their own children to college. In the 1990s the Clinton administration tried expanding federal tax breaks for higher education (more on the below), but it did little to stem the tidal wave of student loan debt for Americans.
So does the Obama program provide a significant relief for American students? The answer is, kind of. For students borrowing from the federal government, the income cap in particular will be helpful because it means students will be able to fit their debt into their overall monthly budgets. Also, the twenty year cap will make it easier for students to balance student debt with other financial obligations like saving for retirement or paying for college for their own children.
Unlike Mom, I don’t feel like the new limits will send students thronging to America’s most expensive schools. To begin with, most students can’t get into these places in the first place. Students at elite private schools make up only a tiny fraction of America’s students. More importantly, future debt is only a part of the considerations students balance when choosing a school. Factors like academic offerings, proximity to home, and short-term affordability are probably more important factors for students and their families. Also, there are income limits on who qualifies for most loans, so wealthy people cannot just borrow a ton instead of paying tuition and then shift the cost to the tax payer.
Also, I disagree that somehow education is a high cost luxury purchased by indulgent students. While stories of people like Kelli Space make good headlines they are completely atypical. Most students graduate with about $25, 000 in debt (which is still a lot) and most pay off their loans. It’s important to base policy on the usual student experience, not on sensational outliers. Most students understand that education is an investment, it is in fact that selling point that leads most students to take out loans in the first place.
However, there are a number of other issues the plan doesn’t deal with and so the Obama proposal is only going to be a small help for students. Here Mom and I certainly agree on a number of things. Universities have become obsessed with their own marketing rather than providing a good value for their students. Schools often pay outrageous salaries to faculty that primarily do research rather than teach, they build ridiculous amenities, and they create expensive programs that are aimed more at snagging warm bodies to pay tuition rather than provide useful skills to students. Until universities, students, and parents learn to accept limitations on what colleges provide, the cost of tuition will continue to rise.
Additionally, if the federal government wants to help needy students, it should not rely on loans as the instrument to do that. If we are serious about helping students (especially low-income ones) we should increase Pell grants, and expand the Hope and Life Time Learning tax credits. In fact, The Grand Inquisitor actually wrote a journal article about this once, which you can view here. Additionally, if the government is going to loan money, at least keep the interest rates on line with what it costs to administer the loan program. My government loan actually has a higher interest rate than my private one, and the interest compounds daily on my federal loan which makes it more expensive in the long term.
Ultimately, we have to realize that if we cannot provide suitable education for our citizens, we are going to be less competitive economically. Wasting human potential is not the way to win in an increasingly competitive and globalized world. We are also going to become an even more stratified society with all of the ugly social implications of that. Angry young people without options are more prone to create violence and social disruption. If we want to avoid those problems we are going to have find a way to provide appropriate educational for all Americans.
