July 14, 2013

Federal Student Loan Program: Scrap It and Start Over.

by Hal Gershowitz

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What price should the nation pay to universally support college education through subsidized student loans?  It is a subject that is dominating headlines right now.   On July 1, student loan rates doubled from 3.4% to 6.8% and Congress is in a tizzy over it even though the President’s own proposal sensibly calls for market‑based interest rates.  Interest rates, however, are the least of the problems burdening the cost of higher education about which we should be worried. We use the word unsustainable in these essays a lot, and a bit further down in this essay we’ll demonstrate the utter unsustainability of the trillion-dollar federal student loan program.

Money should rarely, if ever, be loaned when it produces little or no economic benefit to anyone, and therefore has little chance of being repaid without having a corresponding negative economic impact elsewhere.  Yet enormous debt is being accumulated often to fund studies that may gratify students and the institutions that ultimately receive this largess, but will provide little or no skills beneficial to the society, i.e. the taxpayers who are subsidizing the loans.  Universities often are offering degrees in subjects that they themselves acknowledge won’t be productive except for the “enrichment” of the student.  Let’s not have taxpayers subsidize that.

Let’s be real.  If the field of study a student is going into is not likely to produce a good return on the investment, why should the taxpayers loan the money in the first place?  Subsidies create big problems through artificial stimulus.  The system needs to be reformed and majors need to be rated for their realistic value based on real world data.

We have, for a long time, heard presidents say that every American should own a home and as we have opined before, we don’t think so.  Every American can’t afford to own a home. That’s why we have rental housing.  We saw what happened in 2008 to the housing market when the value of peoples’ homes sank until they were under water.  Values decreased below the outstanding mortgages for which people were personally responsible leaving a tsunami of bankruptcies and foreclosures for those who could not continue to meet their mortgage obligations.  Similarly, not every student needs to (or should) go to college.  There is great demand and plenty of outstanding, well-paying opportunities available in many fields that do not require a college degree. Tax payers should not be subsidizing education for which there is little need.

Many of these loans do not get repaid and the federal government cannot go chase every student who defaults on their student loans or those who just continue to pay interest but never reduce the principle.

Why not rate student loans by society’s need for the degree (think skill) the loan is funding?  Let’s limit taxpayer-subsidized loans to those fields of study that produce skills that are in high demand such as engineering or science or mathematics or language or any other high-demand areas of concentration that will produce graduates with a high probability of finding productive employment.

Top Senate Democrats want a cap in place to protect students from interest rate increases.  This is at odds with President Obama’s proposals and those of various congressional Republicans. The President and congressional Republicans are calling for rates tied to the ten-year Treasury bond and without caps.  Republicans who prefer a market‑based approach correctly point out that the White House’s proposal falls more in line with their own.

Republicans in the Senate came to the table with similar proposals.  Senate Democrats attacked the President’s plan, refused to work with Republicans and left for the July Fourth holiday without passing their own bill.

Should the government have ever gotten into the business of financing student loans in the first place? Maybe not. Every time the government loan largess increases, colleges and universities have hiked tuition rates.

Listen to George Cornelius, a former CEO and college president who now writes the education blog Finding My College. Cornelius sees the federal government as largely responsible for the runaway cost of education in America, where average tuition at public four-year colleges has jumped 42 percent in the last five years primarily funded by students with their federal loans in hand.

“My frustration is almost ‘Who cares?’ That’s not the point, whether the rate is 3 percent or 6.8 percent. It’s the principle that’s the problem,” Cornelius said. “The more money you throw at it, the more it will go up, I guarantee you. No matter how much you give, it will never be enough.”

Theoretically, losses on student loans should be low even when students default, because these loans cannot be discharged in bankruptcy. That is, unless repaying the loan would create an undue hardship for the student borrower and his or her dependents.  In 2005 the bankruptcy laws were changed so that private educational loans also could not be readily discharged in bankruptcy.  It seems predictable, however, that many debt-burdened graduates will claim that repaying loans will create an undue hardship and will have their loans discharged in bankruptcy.

The writing is on the wall (as the expression goes); delinquencies are also on the rise. The number of borrowers who are at least 90 days late on student loan payments has jumped from 8.5% in 2011 to 11.7% today, according to a study by the New York Federal Reserve.

Here’s an indication of how burdensome student loans have become: About one-third of millennials say they would have been better off working, instead of going to college and paying tuition.

According to a Wells Fargo study, more than half of recently graduated students who financed their education through student loans, said if they had $10,000 the “first thing” they’d do is pay down their student loan or credit card debt. That’s no surprise when you consider student borrowing topped the $100 billion threshold for the first time in 2010, and total outstanding loans exceeded $1 trillion for the first time in 2011.  Student loan debt now exceeds credit card debt in the U.S., which stands at about $798 billion.  While it is commendable that many students place a high priority on paying off their student loans, these loans create a very unintended consequence. Young people with considerable debt burdens end up delaying life-cycle events such as buying a car, purchasing a home, getting married and having children.

The Consumer Financial Protection Bureau found student debt has also affected home ownership in the country. Census data reveals that nearly 6 million Americans ages 25 to 34 lived with their parents in 2011, a sharp increase from 4.7 million in 2007.

The CFPB cited The National Association of Home Builders (NAHB) saying higher student debt burdens “impair the ability of recent college graduates to qualify for a loan.” According to NAHB, high student loan debt has an impact on consumers’ debt-to-income (DTI) ratio– an important metric for decisions about credit worthiness in mortgage origination.

Politicians have long championed the idea that every young person should be encouraged to a get a college education.  Sounds good.  But is it?  Americans owe $700 billion in car loans, more than $800 billion on our credit cards, and student debt now tops $1 trillion. This just doesn’t weigh down the 37 million former students who owe it, but the whole economy.  Prominent left-wing economist Paul Krugman in a recent public interview opined, “The preponderance of the evidence is that the biggest single factor keeping us where we are… is the overhang of debt. Household debt is the big ball and chain on this economy, and student debt is a big part of it”.

As invariably is the case, big government subsidies always create big government distortions in the economy.  Nowhere is this more obvious than with the student loan program. Sara Goldrick-Rab, Associate Professor of Educational Policy Studies and Sociology, at the University of Wisconsin says colleges are finding that the more you charge, the more people want and are willing to pay.”

The federal student loan program has resulted in lots of dollars chasing the goods and services universities provide.  The consequences should not be surprising. Goldrick-Rab continues, “The average full professor’s compensation at American schools last year was $134,000, up about 2 percent from 2011, although many made significantly more. Colleges are also shelling out record amounts to their presidents, whose median compensation at public research universities went up 4.7 percent last year to $441,392. The top dollar for a sitting public school president went to Auburn University’s Jay Gogue, who made $2.5 million in total compensation. The Auburn trustees who approved Gogue’s salary also recently voted to increase next year’s student tuition by 4.5 percent, on top of an 8 percent increase last year and a 13 percent increase in 2010.”

As The Daily Beast observed, Students are arriving at school with a fist full of money (and a truckload of future debt). Schools are only too willing to provide their money’s worth to these well-funded consumers.  Students looking for a recreation center with an acre of cardio and weight machines like the ones used at the Beijing Olympics can find it at UMass Amherst. The aquatic enthusiast should head to the University of Cincinnati , whose rec center promises “850,000 gallons of fun” with three indoor pools, a vortex, a bubble couch (whatever that is), and a current channel for those “looking for an upstream workout.”  Then there is The university of Iowa’s $72 million rec center which sports a vortex, a massive climbing wall, 72 tread mills with TVs, a 25-person hot tub, and a “club level” locker room with a biometric hand scanner for extra security. All of this prestige doesn’t come cheap, but the money (loans) to pay the ballooning cost of attending these colleges does. And that’s the problem.

All comments regarding these essays, whether they express agreement, disagreement, or an alternate view, are appreciated and welcome. Comments that do not pertain to the subject of the essay or which are ad hominem references to other commenters are not acceptable and will be deleted.

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5 responses to “Federal Student Loan Program: Scrap It and Start Over.”

  1. susan duman says:

    The manner in which you approach huge fiscal and societal problems is so smart and well researched.
    I’m so glad I get to share your information.

  2. Mark J Levick says:

    The President has made a college education a right. The Government prints money to pay college tuition. The Colleges spend that tuition money on facilities and staff benefits. They provide remedial reading courses so that their graduates can get jobs as cashiers, waitresses and clerks. The teachers unions and students vote for Democrats. The debt encumbered graduates not so much. Solution: forgive the debt and expand the program. That’s deemed Progressive. What if student loans were only available to scientists, computer programmers, engineers, doctors, linguists, etc. and could be paid in full upon completion of five years of Government service? That would be smart but would not be fair to the kids who get prizes for being mediocre not to mention tenured educators who teach courses that amuse but don’t deliver skills that have an economic value commensurate with the cost incurred. Solution: Create more Government or paper pusher jobs. We have Obamacare, consumer protection and all types of regulatory agencies that make little economic sense but save from ourselves and employ millions who could never make it on their own business smarts and initiative. Many of those folks are called educators and public servants. They are giving real educators and public servants a bad name and the rest of use new opportunities to pay more taxes and service fees.

  3. Joseph Noren says:

    Perhaps we should be expanding trade schools and/or schools that teach such skills as die makers, plumbers, electricians, welders etc.
    We had to hire welders from China to repair the Oakland Bridge..
    The general contractor could not find enough qualified welders in this country…. Is any one listening?

  4. Joseph Noren says:


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