A Discussion of Student Loans

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:

1. 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.
2. 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.
3. 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.
4. 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.

Notable & Quotable - WSJ April 19, 2012

Ron Bailey writing at Reason.com, April 18:

     Forty years ago, The Limits to Growth, a report to the Club of Rome was released  with great fanfare at t conference at the Smithsonian institution.  The study was based on a computer model developed by researchers at the Massachusetts Institute ofTechnology (MIT) and designed "to investigate five major trends of global concern - accelerating industrial development, rapid population growth, widespread malnutrition, depletion nonrenewable, and deteriorating environment." . . . In 1972, the Limits researchers estimated known global oil reserves at 455 billion barrels.  Since then the world has produced very nearly 1 trillion barrels of oil and current know reserves hover around 1.2 trillion barrels, a 40-year supply at current consumption rates.  With regard to natural gas supplies, the International Energy Agency las year issued a report asserting, "conventional recoverable resources  are equivalent to more thatn120 years of current global consumption, while total recoverable resources could  sustain today's production for over 250 years."

Privilege

I read an interesting op ed piece in the  WSJ recently written by Lawrence Lindsey, a former Governor of the Federal Reserve.  In it he addresses the issue of privilege that the current administration throws out so frequently.  Citizens of  the US enjoy their citizenship as a right of birth or earned through the process of legal immigration.  It is not really a privilege.  The only actual privilegehere is the one that is granted to those in power by those who allow themselves to be governed.  When those in that position dictate laws and regulations that rein in the rights of the governed they are abusing the privilege that has been granted to them, and they deserve to have that privilege revoked.

The Laffer Curve Continues

The Wall Street Journal reported an interesting tidbit this week.  Preliminary figures released this week show that Great Britain's 50% top marginal tax rate may have reduced tax revenues from the top income bracket by as much as 5% when compared to the previous (lower) rate of 40%.  The new tax rate kicked in last year.  It was a hold over from the previous Labour government during its last days in power.  The Tory-Liberal coalition in power now, headed by by Prime Minister David Cameron, decided to keep it in place.  As Mr. Cameron put it in a speech, "...those with the broadest shoulders should bear the heaviest burden."  Sound familiar?

Anyway, the numbers for the first full year of its impact were released and they show that Britain's richest taxpayers are simply shifting their incomes, or themseles, offshore.  Arthur Laffer validated once again.  When the tax base is mobile and has choices, as tax rates go up, tax revenues ultimately will go down.

The Laffer Curve Revisited

So I read in the news that the Senior Senator from New York has an idea.  Senator Schumer is backing an idea that would allow US corporations to repatriate their overseas profits at a lower-than-usual tax rate.  You see most industrialized nations use a territorial tax system where companies with operations abroad pay only taxes imposed on their profits by the host country.  This allows those companies to ship their profits back home (read China for instance) with little or no extra tax imposed.  Here in the US however, any profits that are repatriated back to The Land of The Free are then taxed again at existing US corporate (and state) tax rates.  Remember that the US corporate tax rate currently at 35% is the second highest in the world.  Also remember that these repatriated profits could be used by the corporation to do such things as pay dividends, buy back common stock, or invest in domestic expansion. 

Anyway, Senator Schumer proposes giving corporations a one-year break by reducing the US corporate tax rate for repatriated profits to 5.25%.  Economists estimate that there are north of $1 trillion in profits abroad that could be repatriated.  Under this scenario this could net the US Treasury $525 billion in tax receipt revenues.    This is not the first time that such a proposal was tried.  In 2004, a similar one-year break was put in effect.  According to the IRS more than 800 firms repatriated over $360 billion in profits and delivered a windfall of $18 billion in federal tax revenue.  Could it be that the Laffer Curve is once again validated, and a decrease in a tax rate could result in an increase in tax revenue?