A Discussion of Student Loans
Saturday, April 28, 2012 at 04:22PM Where does one start? The President has politicized the student loan issue. Recently it was acknowledged that the level of student loan debt had reached disturbing proportions – approximately $1 Trillion – more than US consumer credit card debt. But before we dive into the politics, let’s look at the history.
In 2006, upset with a number of things, not the least of which was the growth in the Federal budget deficit under the Bush administration, the voters turned control of the congress back to the Democrats. The Democrats had – among other platform promises – made the pledge to put the country’s spending on a “pay as you go” basis. Fast forward to June 2007, and the Democrat-controlled congress pledges to make college tuitions more affordable by installing a cap on the rate for government student loans of 3.2%. Part of the rationale was that, since the program would be funded by borrowing (yes, Uncle Sam borrows the money that it lends to students) the interest rate should at least cover the cost of capital and the associated administrative expenses. Acknowledging that interest rates could rise in the future, the legislation kept the3.2% rate until July 2012, and then had it double to the fiscally sound rate of 6.4%. Why they chose only a five-year period is open to conjecture, but it is interesting that the automatic rate increase would come only four months before a national election, making any steps to allow the rate to rise end up looking like a ”tax hike”. Nonetheless, to keep things fair, the rate hike would only apply to those loans originated after the July 2012 date. So much for phase 1 of the history, now on to phase 2.
As part of the Patient Protection and Affordability Care Act (Obamacare) passed by the Congress in 2010, the Federal government took over the 4/5ths of the student loan program that is Federally-backed. The excess revenue expected to be generated by student loans originated after July 2012 then went into the pot as part of the Congressional Budget Office’s scoring of the legislation’s cost. So there you have the rub. If the annual rate is allowed to go to a more realistic 6.4% (fixed), the flow of cash back to the government will be part of the revenue side of the Patient. If it does not go up, then the positive side of the cash ledger takes a hit, and Obacare’s cost to the nation becomes uglier.
Now for the mechanics -As cited above, the rate will go up on only those loans that are Federal controlled (about 4/5ths of the $1 Trillion total), but only for those which are originated after July 2012. No effect one way or the other on the $1 Trillion already out there. Now for some other inconvenient truths:
- The average debt for those students who currently have loans outstanding is somewhere in the $23,300 range according to the Federal Reserve. This includes all those who are pursuing post graduate work – doctors, lawyers, English literature PhD candidates, etc.
- The median debt for those students who currently have loans outstanding is somewhere in the $12,800 range. Median debt means that one-half of all loans are for less than $12,800, and one-half are for more than $12,800. Why the difference? Many of the loans are for only a portion of the tuitions, and many are for qualified post-high school education other than at a four-year college. The bottom line is that while there is a tremendous amount of debt out there, not all of those who have a debt are carrying more than the equivalent of a car loan.
- The US Department of Education and the White House have stated that, based on the $23,000 average, keeping the interest rate at 3.2% will save the student a little over $1,000 in interest payments over the life of the loan.
- Sallie Mae (the Federal issuer of such loans) says that atypical term for such a loan is about ten (10) years. Doing the math, if the interest rate is not kept at 3.2%, that additional $1,000 expense would burden the typical student loan holder with an additional payment of approximately eight dollars ($8.33)per month. If that holder of the student loan was enrolled in a four-year college, and graduated on time, he would have to start paying this burdensome additional $8.33/month in July of 2017.
This is a manufactured political issue being raised in an election year to pander to voters who are unwilling to examine the facts.