Over the past few weeks, and certainly over the next several days, the talk about federal student loans has been rampant. There is a frenzy of finger-pointing and blame that has kept politicians busy and allowed a minor respite for the presidential campaigns in discussing the economy. Both sides are adamant that something must be done, neither side wants to allow the other to look like a hero. But the question not asked is, is this a big deal?
Yes, student loan debt has increased in the nation in recent years. Yes it surpasses the consumer debt – because the horrible economy has caused Americans to reduce debt and restricted credit. But on July 1st, will the world relatively end for college students?
No. Time for a bit of facts and context, that politicians have avoided in their efforts to gain political favor in an election year.
First, backtracking a bit, is the fact that the upcoming issue was created squarely by the short-sighted thinking of politicians. In 2007 legislation was passed to reduce the interest rate on student loans, gradually bringing the rate down to the current 3.4%. That same law allowed rates to skyrocket up to 6.8% as of July 1st.
Why did politicians create a law to gently drop rates only to create the current panic about rates increasing dramatically 5 years later? Expectations of a better economy is one potential reason. Plans to reap a coup in a presidential election fight (by rescuing the college students just in time) is another potential answer. But based on the lack of attentiveness of many politicians (Rep. Jon Conyers comments on reading the Health Care Reform comes to mind, as does Rep. Nancy Pelosi’s infamous ‘Pass it to find out what is in it’ comment) the most probable reason is they just didn’t know that was the way it was written – or didn’t care as it was a problem for a Congress that they were not up for (re-)election in.
Whatever the reason, conjecture aside, the result is what we are facing today. Democrats desperately need legislation that they can present to college voters to shore up the demonstrable lack of enthusiam in the 2012 elections. Republicans need to deny Dems that victory, or usurp it to garner those votes for themselves – assuming college voters actually show up this time around.
But how important is reducing federal student loans? Obviously current and future students are concerned about it, but what difference does it really make?
7.4 million college students are expected be affected by a July 1st increase in the loan rate, according to the Education Department. The average loan is expected to be $4,226 – of which the loan rate (affecting students AFTER leaving college) will be an increase of roughly $1000 to the total loan amount. Generally the loans are structured to be paid in 10 years, equating to an increase of $100 a year over 10 years.
So the panic is over approximately $8.33 a month. Given the economy is sputtering, jobs are hard to get. But the panic is over – and yes this is oversimplified to assume just 1 loan – the cost of 2 or 3 beers without a tip a month. Given perspective, does this sound daunting?
Consider that the cost to become a doctor or lawyer for example – with or without a change to loan rates – will still cost in excess of $100,000 in loans. With or without the change students will still go to college. With or without the change in loan rates the average income of a college graduate (October 2011) was $51,171, up from $48,288 a year earlier. The median American has a salary of $51,413. But college grads don’t have home mortgages, 2.4 kids, and decades of credit card debt to contend with on average either.
Look at it from another point ov view.
College students have become an entitled and dependant minority. The degree of anxiety placed on getting student loans to remain low implies that college students are incapable of getting jobs, surviving in the real world, or addressing adult concerns of paying bill and making ends meet without the hand-holding effort of Congress. These are the future leaders of America, and they must be coddled as $8.33 is too much of a burdon to bear.
From a peak of student loan defaults at 20% in the 1990’s, there has been a steady drop in defaults. Given the peak of the monetary crisis in 2008-09 did raise the rates, they still are nowhere near that double digit level. Essentially, students in the past somehow managed to pay their debt without the Government jumping in to rescue them even though they were paying a far higher interest.
But even forgetting that in entitling yet another group of Americans we are teaching that Government will do it all, is the most important thought of all. When will this Government manipulation of student loan rates end?
The arguement is that we cannot increase student loans interest rates today – because of the enormous burden (additional $8.33/month) it will place on college students that have entered the workforce, or left college. Even though this only affect NEW student loans, not previous ones.
What if, as even the White House predicts, that the economy remains sluggish for an extended period of time. When do you increase rates, or allow them to be controlled by market forces again? What if the date set is in the middle of another recession, do we extend or lower the rates then?
What if, the average income of college students drop – do we continue to provide them low interest because they can’t (apparently) be trusted to balance a checkbook? What if inflation rises, do we continue to protect them? What if there is an important or close election year, do we hold off to get more votes?
At what point does it become politically ok to increase student loan rates? Probably the same time when it would be ok to raise taxes across the board and reduce entitlement spending. Glancing at the national deficit and debt, that time has yet to come.
Harsh as it may be for some to hear, the simple answer is allow interst rates to gradually return to the normal market-driven rates they should be at. Students will still go to college, some will still default on the loans. Overall the majority will survive without the coddling (and hopes of reciprocal votes) of Congress and the Government, just as Americans have done in the past.
Instead, the most likely outcome will be that a mashed-together piece of legislation, with plently of points that each political side will claim as their victory and a reason votes should shower their politicians, will be passed. It will shuffle the actual decision of when to increase rates off to a Congress in the future. It will quietly and without fanfare turn college students into yet another entitlment group.
Bottom-line America will get more of the same, lack of decisive action, a focus on another special interest group, a skewing on the value of self-responsibility and the consequences of decisions.
It would be nice to be proven wrong, but around July 1st it will likely not happen.
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