Tag: student loans

Student Loan Gifts Don’t Help

Today must be student loan day in President Obama’s “year of action” – also “year of midterm elections” – as the President announced he will expand eligibility for student loan repayment capping and forgiveness. In addition, this week the Senate is set to take up Elizabeth Warren’s (D-MA) bill to federally refinance student loans at lower interest rates, including truly private loans.

Let’s review the folly of such seemingly well-intentioned efforts:

  • Making student loans cheaper, which includes indicating that Washington will always soften your loan terms if politically possible, mainly encourages students to demand more stuff, and colleges to charge more. They’re called “perverse incentives.”
  • In the name of helping them, federal politicians, and many other people, massively oversell higher education to the detriment of students. Perhaps as much as half of people who enter college don’t finish; a third of people with a bachelor’s degree are in jobs not requiring the credential; underemployment is even worse for graduate-degree holders, and; cheap college has almost certainly fueled credential inflation, not major increases in knowledge or skills.
  • Decreasing what borrowers will repay means taxpayers – who had no choice in whether the loans were made – have to make up the difference. And there is a little matter of being nearly $18 trillion in debt already.
  • The Public Service Loan Forgiveness program encourages people to work for not-for-profit entities, especially government. As if government work were a major sacrifice, and things produced or operated for profit such as iPads, grocery stores, bicycles, door knobs, restaurants, books, airplanes, and on and on, didn’t make us better off.

Someday, I hope somebody’s “year of action” will finally deal with the crippling reality of federal student aid “help.” But that will only happen if the public gets tired of sweet-sounding “solutions,” especially in years of elections.    

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.

 

A Big, Tiny Deal on Student Loans

After a bit of a false start last week, it sounds again like the Senate is on the brink of a bipartisan compromise that will link rates on federal student loans to overall interest rates. Given all the hubbub that’s surrounded the loans, that’s big news. Given the actual change that would take place, it’s tiny.

Based on reports so far, the plan seems to be to eventually peg all undergraduate loans – both the officially “subsidized” and “unsubsidized” – to 10-year Treasury bill interest rates, adding 2.05 percentage points. Today, that would make the interest rate 4.57 percent. However, it appears that the compromise would put rates at 3.85 percent this fall. That’s no doubt a sweetener to appease student interest groups, whose goal is to get the cheapest loans possible regardless of the rest of the economy, and who don’t think a deal pegging student loans to T-bills is so hot.

To be fair, the deal isn’t hot. It’s barely room temperature. But that’s because it still gives away far too much, not too little. Taxpayer-backed loans that go to almost anyone have been a sweet-sounding disaster, encouraging people to consume education they aren’t willing or able to complete; prodding people who are college-ready to demand things that have little or nothing to do with education; and fueling rampant price inflation throughout the system. And, like last week’s abortive deal, this one appears to eliminate the different rates for the “subsidized” loans – those geared to truly low-income students – and the “unsubsidized” loans that have no income cap. In other words, the student aid system that is already heavily skewed toward the better-off seems likely to become a bit more so.

If this compromise eventually gets signed by the president, it will likely be hailed as a big, bipartisan deal. And maybe politically it would be. But as policy? It would barely register.

“Crisis” Averted on Backs of Poor?

This morning, I was greeted with the news that the Senate has reached a compromise on student loan rates, likely averting the “crisis” of having rates on “subsidized” loans – those most targeted toward low-income students – double from 3.4 percent to 6.8 percent. Of course this wasn’t really a crisis. The increase would only have affected new loans, would have just added about $6 to monthly payments based on the average yearly subsidized loan, and might even have been slightly useful because the primary problems in higher ed are massive over-consumption and price inflation driven by cheap aid. If we want to fix those things, we should be phasing out price and consumption-distorting aid programs.

Suppose, though, you think federal aid is necessary to make sure college is affordable for the truly needy. I assume that most aid supporters – including those who voted for the compromise in the Senate – would say that that is the top goal. So why, then, does the compromise set the same interest rates for subsidized loans as unsubsidized, the latter being accessible to anyone regardless of income? Wouldn’t a top priority be to keep the subsidized rates lower? (Subsidized loans would, importantly, still have interest covered by the government while students are in school.)

Maybe information explaining this will come out as more news breaks, but it seems quite possible that the main objective is not, actually, to help the most needy, but to appear to help anyone who wants to go to college, regardless of income or need. Maybe it is to curry favor with as many voters as possible. That hypothesis not only seems to fit the current case, but overall federal involvement in higher education, which involves not just Pell Grants or subsidized loans largely focused on the poor, but unsubsidized loans that have no income cap; tax credit programs skewed toward the well-to-do; and a whole perverse aid process that favors those people who know when to buy homes, time raises, and other savvy tactics to maximize what they get from schools and taxpayers.

If the goal were really to help the truly needy, it seems the Feds would have a single grant or loan program aimed squarely at people earning, say, 200 percent of the poverty line. But, as this compromise seems to further confirm, that’s probably not the primary goal. Maximizing votes is, which is exactly what we should expect from politicians who, like all of us, want first and foremost to get what’s best for themselves. It’s also why, for everyone’s sake, we should demand that the Feds stay completely out of student aid.

6.8 Day Is Here!

Washington hasn’t passed a new law to avert it, so today’s the day that all of higher education has, it seems, been dreading: The day that interest rates on subsidized federal student loans double, going from 3.4 percent to 6.8 percent.

Hooray?

In the long term, it might actually be good if these rates – which will only affect some federal borrowers – go up. (Congress could still lower them retroactively.) Why? Because federal aid has fueled decades of rampant price inflation, giving basically anyone whom a college would accept – and many colleges will accept anyone – the money necessary to pay sky-high prices. Perhaps the rates rising will dissuade some people from going to college who should be doing something else, or some people going to college who should be there from choosing a more expensive school that offers no better academics but lots of superfluous frills.

That said, the uptick in rates is likely to have little major effect on what people are willing to pay. And to some extent that is as it should be. The average college graduate will earn enough additional money as a result of having a degree that the additional debt is worth taking on. However, roughly half of people who enter college won’t complete their studies, and half of those will earn below the average for whatever piece of paper – some sort of certification or degree – they complete.

Perhaps the most discouraging aspect of all this isn’t the financial impact of the doubling, but that Congress couldn’t get a deal done. If you are going to have federal student loans, it makes sense to peg them to interest rates such as those of the 10-year Treasury Bond rather than having Congress fix a number for several years. At least then they will fluctuate with the overall time value of money. Indeed, that concept was sufficiently agreeable that President Obama proposed such an idea, and the Republican-controlled House passed roughly similar legislation. But, in a surprise move, President Obama threatened to veto the legislation without, it seems, any effort to negotiate with House leaders first, and Democratic Senate leaders called mainly for freezing rates at 3.4 percent until they could reauthorize the Higher Education Act. There was even a bipartisan effort in the Senate to push through a bill similar to the House measure and the president’s, but it went nowhere. 

Why the breakdown? It’s hard to know exactly, but easy to see a suspect: politicians, especially Senate Democrats and to a lesser extent the president, didn’t want to do anything that didn’t appear to give students the cheapest loans possible. That’s bad news for any future compromise, but much more importantly, a clear and troubling sign of why, barring loud public outcry, we won’t get the long-term solution we need: phasing out federal student aid to force students and colleges to demand and furnish efficient, effective higher education.

How about ‘Don’t Give Them Loans at All’?

The big catch phrase for those fighting to keep subsidized student loan interest rates at 3.4 percent is “don’t double my rate.” That’s because the rate is set to increase from 3.4 percent to 6.8 percent on July 1. But if President Obama’s Rose Garden pep rally today is any indication, the phrase should be more like “don’t raise my rate at all.”

The POTUS attacked recently passed legislation in the House–which tracks pretty closely with his own proposal–because, he said, it doesn’t do enough to keep loan rates low. Really? The Smarter Solution for Students Act–which, by the way, is hardly all that smart–would set interest rates for subsidized loans at the 10-year Treasury note plus 2.5 percent. Today, that rate is 2.3 percent. Adding 2.5 to it is 4.8 percent, absolutely not a doubling of 3.4.

Of course, T-bill rates could, and likely will, rise, but the main point is supposed to be to make student loan rates track with normal interest rates rather than have politicians set them arbitrarily. That was certainly the case over the last few years, when student loan rates didn’t plummet along with overall rates. But it seems a tracked rate isn’t really what students and colleges want: they want super-cheap–preferably free–loans, which makes sense (for them). Like normal people, they want money at as little cost to themselves as possible. Unfortunately, but not surprisingly, that is what many vote-seeking politicians want to give them, despite the powerful evidence that aid mainly lets colleges raise their prices at breakneck speeds, fuels demand for frills, and abets serious noncompletion. In other words, it likely does more harm than good.

All of this is why Washington should get out of student aid entirely. But for that to happen, regular people will have to make their catch-phrase, “Don’t give them loans at all.”

Student Loans: From Completely Disastrous, to Just 99 Percent

the state of higher ed fundingOn Thursday, the U.S. House of Representatives is scheduled to take up The Smarter Solutions for Students Act, which would end the practice of Congress designating interest rates for federal student loans, and instead link rates to the 10-year Treasury note. It would be a miniscule improvement. Basically, this change is like banging out a single dent in a car that’s careened off a cliff, rolled over twenty times, and caught fire.

It seems reasonable that if Washington is going to provide student loans, interest rates should be pegged to broader rates. There is disagreement about how much you add to base rates—Rep. George Miller (D-CA), for instance, is unhappy that the act’s rates could result in profits that would be used for deficit reduction—but letting Congress designate set rates is why we are once again scrambling to keep the subsidized loan rate from suddenly leaping to 6.8 percent from 3.4 percent. 

Of course, the root problem is that Congress furnishes student loans at all, killing the natural discipline that comes from people paying for something with their own money, or money they get from others voluntarily. Getting major dough from taxpayers has enabled massive overconsumption of higher education punctuated by dismal completion rates and huge underemployment for those who manage to finish. And giving people cheap money largely just enables colleges to raise their prices at breakneck speeds, often to provide frills that heavily subsidized students seem to happily demand.

Congress may inject a milliliter of sanity into a swimming pool of irrationality, but what it really needs to do is drain the whole thing.

Cross-posted at seethruedu.com

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