President Obama’s student-lending reforms promise dramatic changes to the way students pay for college. And while some believe the new system will help the millions of students and graduates whose student loan debt now outpaces national consumer credit card debt, others are wary of the legal, social, and financial consequences of the President’s reforms.
President Obama told students at the University of Colorado in Denver last month that a 2010 law, which offers unprecedented repayment options “for new borrowers on and after July 1, 2014” will be enacted “next year, because our economy needs it right now and your future could use a boost right now.”
Far from stimulating the economy, as the President claims it will, the new student loan plan will add $1 trillion in federal spending over the next ten years by eliminating private lenders’ involvement in federal loan programs, by capping student loan payments to 10% of a borrower’s “discretionary income” — defined as the difference between the borrower’s adjusted gross income and 150% of the federal poverty line — and by forgiving any remaining debt after twenty years. The original 2010 law had capped student loan repayments to 15% of discretionary spending, and guaranteed loan forgiveness after 25 years.
There are a number of problems with this approach, not least of which is the legality of what the President has promised. The 2010 law is clear when it states that the new repayment option will be offered in 2014. What is unclear is whether President Obama intends to change the timeline for implementing the existing law through an executive order, which may be illegal given the regulatory category under which the new rules fall, or whether the rules will require “negotiated rulemaking” by a government panel. Capitol Hill staff say the panel option would not leave enough time to enact the promised rules by next school year.
Many are concerned that the new program gives borrowers little or no incentive to repay their loans. With relatively low payment maximums based on each borrower’s changeable income, regardless of loan amount, many loans will easily outstretch the twenty year maximum President Obama has called for. It is easy to imagine a long series of scenarios in which borrowers wait out their loan terms while repaying as little as possible, and emerge debt-free with minimum effort or financial expenditure, leaving taxpayers to foot the bill.
When asked why borrowers would want to repay their loans under the new terms, Secretary of Education Arne Duncan simply said, “people want to do the right thing.” This answer ignores the fact that student loan default rates have been increasing for nearly a decade, and are now at an all-time high of 8.8%, indicating that millions of students routinely borrowed more than they could afford to repay even before the new system encouraged that practice. Existing student loan debt approaches $1 trillion, making it the largest form of debt in the United States today. The new repayment options will have no effect on this existing debt, but will only kick in for new borrowers. These new borrowers, lulled by the promise of low monthly payments and automatic debt forgiveness, will have little incentive to change the financially unstable borrowing patterns that caused the crisis in the first place. Additionally, jobless rates for Americans with at least a Bachelor’s degree currently stand at 5.1%, their highest since 1970.The stagnant economy makes it appear unlikely that that number will improve any time soon. Even those who choose not to take advantage of the President’s supposed benevolence may find themselves unable to pay back what they have promised.
Irresponsible borrowing practices aren’t the only problem that will be magnified by President Obama’s new plan. The rising cost of a college education already far outpaces inflation, and easy access to federal funds has historically encouraged this trend. Heritage Foundation education analyst Lindsay Burke writes,
. . . increases in federal subsidies over the decades haveÿnot reduced college costs. Even though federal subsidies like Pell grants have increased 475 percent, the cost of attending college has increased 439 percent since 1982 — faster than the rate of health care increases.
Increases in federal subsidies give students increased purchasing power, which incentivizes colleges to raise tuition, in turn leaving students scrambling for more student loans. It’s a vicious cycle that does nothing to mitigate the cost of attending college.
The average student graduates from a four-year private school with about $28,000 in debt today, while those who attend less expensive state schools can expect to owe about $22,000. Students are still taught that a college degree is a necessary prerequisite to entering the job market, and thanks in part to the United States’ mediocre K-12 public education offerings, this is often true. But as federal funds have already made even the most expensive colleges and Universities relatively accessible, the real value of the education many students receive has become less and less certain. As the Wall Street Journal’s William McGurn has pointed out,
“. . . the more costly a college, the less likely it will require a demanding core curriculum . . . the problem is not so much the liberal arts as the fluff that too often passes for it . . . more than a third of seniors leave campus having shown no improvement in critical thinking, analytical reasoning, or written communications over four years. Worse, the majors and programs often thought most practical — education, business and communications — prove to be the least productive.
The President has said that his new repayment plan will save borrowers “hundreds” of dollars each month by lowering required monthly payments. This may prove true for a few borrowers — analysts are still hashing out the numbers and some believe the bulk of borrowers will benefit by as little as $10 per month — but in any case the qualifying pool is small. Many borrowers will be helped only minimally or not at all, and the stimulating effect that President Obama has promised for the U.S. economy is unlikely to manifest itself. First of all, only direct federal loans and government-guaranteed private loans qualify for the new repayment option. Second, only future students and some current students are eligible. Those who default on their loans before choosing the alternate repayment plan are disqualified. The Atlantic’s Daniel Indiviglio writes,
To be sure, this rule will provide some relief to the handful of borrowers who qualify. But due to the limiting criteria of who can actually take advantage of this program, it’s hard to see how moving up the implementation date to 2012 instead of 2014 would provide much immediate stimulus to the U.S. economy.
Even if the new loan plan did have a stimulating effect, it would be difficult to outpace the $575 million a year that the Congressional Budget Office estimated the original 2010 law would cost taxpayers. The plan is expected to have a stimulating effect on President Obama’s reelection chances, however. Education Week’s Michele McNeil wrote recently that President Obama is using his “record of education — and that of congressional Republicans — as a political weapon as Campaign 2012 heats up . . . playing up the deadlock in Congress and rolling out education initiatives his administration can do on its own.” Stephen Burd of the blog Higher Ed Watch admitted that “The Obama administration sees student aid as an opportunity to spell out the political differences between them and the Republicans in Congress.”
Republican candidates and lawmakers have also had plenty to say about the student loan plan. “I just think this is a mistake,” Rep. John Kline, chairman of the House Education and the Workforce Committee, said on “Fox and Friends” on October 31. “I’ve talked to a lot of people about what the president’s proposal is, and it’s very difficult to figure out . . . All of it, in fact, is going to encourage more borrowing, and I’m afraid it’s going to leave taxpayers holding the bag.” U.S. Rep. Michele Bachmann stated at a recent debate sponsored by the College Board that “There is a morality in keeping our financial promises, and I don’t think we should push that off onto the taxpayer. The individual needs to repay and be responsible for repaying their student loan debt.”
SOURCE: Eagle Forum