Friday, April 27, 2012
Scaring the Children
By Ross Kaminsky on 4.27.12 @ 6:09AM
Obama's Democrats want to stick Republicans with student loan interest rates they themselves mandated.
On Friday, in response to President Barack Obama's latest divide-and-conquer tactic, the House of Representatives will vote on a measure to prevent interest rates on subsidized Stafford (college) loans from doubling from 3.4 percent to 6.8 percent, covering the $5.9 billion one-year price tag of the loan subsidy with money from a preventative care "slush fund" created by Obamacare. Not surprisingly, Democrats suggest raising taxes to cover the cost of their latest vote-buying idea. Following Friday's vote, expect to hear Nancy Pelosi and MSNBC talking heads squawking that Republicans want Americans to get cancer.
Since the "Republican War on Women" claim and the Buffett Rule are both failing to sway voters, Obama's current bright idea is to scare Nanny State-coddled "it's our right!" college students (and their slightly less entitled, mostly middle class parents) about evil Republicans wanting to raise interest rates on college student loans.
Earlier this week, our hyper-political president took his transparent vote-buying argument to major colleges in three political swing states: The University of Colorado, the University of Iowa, and the University of North Carolina.
The fear-mongering talking points are consistent: "The interest rates on student loans will double unless Congress acts by July 1st." Further, Obama says, "For each year that Congress doesn't act, the average student with these loans will rack up an extra thousand dollars in debt."
Note Obama's clever rhetoric: The "average student" will hear the threat as being a thousand dollars a year in additional interest payments. In fact, what the president is saying is that the total added cost to a student for a single year of college debt at higher interest rates is $1,000 over the life of the student loan. Even that is an overstatement.
According to the Project on Student Debt, of the two thirds of college graduates who finished school with debt, the average debt amount was $25,250. However, only about 35 percent of this amount is in the form of subsidized Stafford loans, the only loan type that may see its interest rate rise, from the current 3.4 percent to 6.8 percent, if Congress does not reinstate the lower rate. The other major federal education loan types, including unsubsidized Stafford loans and "PLUS" loans, already have interest rates ranging from 6.8 percent to 8.5 percent.
Mark Kantrowitz, of the student loan website finaid.org, in an NPR interview, describes the impact of allowing the subsidized loan rate to return to its 2006 level: "The average, one-year subsidized Stafford loan is about $3,300. The average subsidized Stafford loan debt at graduation is about $9,000. So a typical student for one year's loan will pay an additional $670 over a 10-year repayment term…. And on that $9,000 cumulative debt, if they continue for the full education, that would be about $1,800 of additional interest paid."
The president suggests that the extra cost to students is effectively a tax hike; it isn't -- but granting his argument, it may be the only tax hike he has ever opposed.
It is an article of faith with Democrats that the Bush tax rate reductions must not be extended, that we should return to the higher income tax rates that existed during Bill Clinton's presidency. But we're told it would be tantamount to child abuse to allow the student loan rate to revert to 6.8 as planned in the Democrats' College Cost Reduction Act of 2007, well below the 7.6 percent average rate in the Clinton years. (The law was written and passed by Democrats. All of the 149 "no" votes in the House of Representatives were by Republicans. No doubt it was written to create this very issue at this very time.)
Even 6.8 percent would be cheap given the staggering rate of student loan default in this job-challenged economy. A Department of Education study released in September 2011 reported that just among the "cohort" of student loan borrowers whose first repayment was due in the year between October 1, 2008 and September 30, 2009, 8.8 percent of them had defaulted before September 30, 2010.
The Obama non-recovery is doing great damage to the job prospects of recent college graduates. According to the Associated Press, "About 1.5 million, or 53.6 percent, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years."
The unemployment rate among college graduates between the ages of 20 and 24 reached a modern high of 9.1 percent in 2010. It is no wonder that the current 8.8 percent default rate among the newest college loans represents the continuation of a painful trend, up from 7.0 percent in 2008, 6.7 percent in 2007, and 5.2 percent in 2006. And these numbers substantially understate the lifetime default risk for student loans, which was over 17 percent in 2009.
What interest rate would you charge on a loan that had such a high chance of default, and particularly if you had to give a loan to a student of the Missouri School of Barbering and Hairstyle, one of the five schools "subject to sanctions for cohort rates that either exceeded 25 percent for three consecutive years, exceeded 40 percent in the latest year, or both"?
Cohort default rates for 2009 at for-profit colleges are a stunning 15 percent, as compared to 7.2 percent for public colleges and 4.6 percent for private (non-profit) colleges. The lifetime default rate for "two year proprietary" colleges is a jaw-dropping 49 percent, and has not been below 47 percent for more than five years. It makes one wonder about the efficacy of for-profit colleges, but it makes one wonder even more why the risk associated with college choices and costs should be borne by taxpayers rather than by the student, his family, and whomever they can convince to give them a loan.
Student loans cannot generally be discharged in bankruptcy, and, according to Mark Kantrowitz, the government typically ends up recovering 85 cents on the dollar even from "defaulted" loans. This can include garnishment of up to 15 percent of a person's income, including income from Social Security retirement and disability payments (the latter troubling Mr. Kantrowitz greatly). He also noted, in an interview for this article, that "government profits from these loans, but is not only focused on profit" whereas credit-underwritten private sector (and not federally guaranteed) loans tend to be less available to minority and low-income students. Some have argued that the financial incentives for the Department of Education cause them to want students to default. Nothing is impossible in the world of unintended consequences of do-gooder government legislation.
Now that the housing bubble has burst, and Americans have spent a few years paying down credit card debt, one of the few remaining bubbles is in higher education. Earlier this year, for the first time in our nation's history, student loan debt surpassed credit card debt; student debt is now estimated at over $1 trillion.
Economist Alan Nasser, in an article entitled "The Student Loan Bubble," points out that states' budget constraints cause tuition increases at public universities to increase, which pushes students into private, and particularly for-profit, institutions. As for "the health of student loans," Nasser notes that "Only 40 percent of [outstanding student loan] debt is actively being repaid. The rest is in default, or in deferment (when a student requests temporary postponement of payment because of economic hardship), which means payments and interest are halted, or in forbearance."
Despite the political sensitivity of tuition costs, colleges feel too able to raise prices because government will raise the availability of loans to match. And if you're an 18-year-old borrowing money to be paid back over a decade or more after you get that dream job, it certainly feels like education is somewhere between cheap and free. If it sounds remarkably like how people think of health care these days, the results of that thinking are apparent in both: Between 2000 and the middle of 2011, the cumulative change in the Consumer Price Index was about 34 percent (with the core, excluding food and energy, up just over 25 percent). The medical care component rose 56 percent, while college tuition and fees rose an incredible 101 percent.
And what are our young adults getting for their money? Not very much, in terms of employment prospects, unless they choose majors that qualify them for industries with strong demand for employees.
According to the AP, in 2011 "young college graduates were heavily represented in jobs that require a high school diploma or less. In the last year, they were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000)."
Furthermore, "According to government projections released last month, only three of the 30 occupations with the largest projected number of job openings by 2020 will require a bachelor's degree or higher to fill the position — teachers, college professors and accountants."
It is the overall economy combined with students' individual choices that are responsible for their financial woes. Contrary to the woe-is-me whining of Occupy Wall Street's many unemployed denizens, it is neither moral nor constitutional for taxpayers to bear the burden of someone's decision to get a degree in theater instead of computer science.
Barack Obama, pandering to one of the few voter groups that might still support him aggressively in 2012, says repeatedly that "In America, higher education cannot be a luxury." But college education is not, as many college students apparently believe, a right (in the sense of being something that must be provided to them in part or in whole on someone else's dime). It is a luxury; we are fortunate that it is one so many in our nation can afford. But like all luxuries, it is the consumer's responsibility, not government's, to find a way to pay for it.
Fortunately, even the idealistic residents of college dormitories (though not their tenured professors) have been awakened to the depressing job prospects after they're handed diplomas and wished good luck in this, the weakest economic recovery in modern American history.
It is understandable that an 18-year-old student who has never had a real job may be swayed by Obama's rhetoric, promising dollar bills raining down from the sky to cover his tuition. Less understandable, or at least more disappointing, is that on Mitt Romney, who on Monday said, "I fully support the effort to extend the low interest rate on student loans."
If Romney wasn't going to stand up for the Constitution or against the tuition inflation caused by federal education loan policy, the least he could have done was, as Senate Minority Leader Mitch McConnell did, point out that this is a transparent ploy to "make [Republicans] look bad to the voters" while distracting from the dismal Obama economy and its 53 percent unemployment rate for recent college grads.
Romney could have said that he'd be willing to consider it if there were offsetting spending cuts elsewhere, as John Boehner did. He could have said that economic growth, which this president is stifling, will make the college loan interest rate irrelevant, and that a bigger subsidy from taxpayers will not help them get a job -- and might actually hurt employment efforts through higher tax bills for the few Americans who actually pay most of the freight.
College education for many -- though perhaps not as many as receive it now -- is a laudable goal for America. But subsidizing it through unconstitutional actions and unjustifiably low interest rates is nothing more than a vote-buying redistribution of wealth from the majority of taxpayers to college students and their parents. It is a difficult political issue for the GOP, which is exactly how the Democrats engineered it. But it is time for the party, and its putative leader Mitt Romney, to speak the truth that even for a good cause there's no such thing as a free lunch (or free college education).
To read another article by Ross Kaminsky, click here.
Posted by Brett at 12:43 PM