Overrated interest

June 27, 2013

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Unless Congress can get its act together before its summer holiday, the interest rate on some new federally subsidized student loans is set to double on Monday to 6.8%. As Bloomberg explains, this bit of Congressional deadlock is about how flexible the loans should be and, not surprisingly, it’s also deficit reduction. Two new bills were introduced Thursday, but ABC’s Arlene Saenz suggests neither has much chance before the July 4 holiday.

Dylan Matthews has a nice breakdown of the issue and the various proposals in play. Rates for more than a quarter of new Federal loans — undergraduate Stafford loans, which are intended for students in financial need —  are set to double on July, to the 6.8% rate currently in place on unsubsidized Stafford loans. Some seven million borrowers could be affected, the White House says.

Still, some, including Matthews and the LA Times’ Michael Hiltzik, see this interest rate shock as a secondary issue: the bigger problem is college affordability.

“Extending the 3.4 percent rate is not a compelling policy goal, and Congress should preserve precious offsets for better purposes, beginning with Pell Grants”, says Robert Gordon, an economist at the Brookings Institution. One of the reasons that Gordon gives for his position is the existence of a little-used program called Pay as You Earn, which allows borrowers who’ve taken out federal loans after September 30, 2007, to repay their loans as a fixed percentage of their income, over a certain period of years.

Here’s Hiltzik on this income-based repayment system:

For many it’s a big improvement over the standard 10-year repayment plans that leave them burdened with bigger monthly payments than they can afford, particularly when they’re just launching their careers.

The $1 trillion in outstanding total student debt increasingly looks like an economic drag — 43% of American 25-year-olds now have student debt, up from 25% in 2003. In April, a New York Fed report showed that young people with large student debt loads are becoming less likely to take on other types of credit, like mortgages and car loans. Mike Konczal points out that there isn’t a clear causal link based on the data, but if it is true that higher student debt causes less borrowing in other areas, “that means college-educated young people are particularly battered in this economy. And there could be a low-level drag on the economy for the foreseeable future”. – Shane Ferro and Ryan McCarthy

On to today’s links:

Cephalopods
Inside the epic, all-night, Goldman Sachs scavenger hunt – Quartz
Goldman’s hiring process: “insecure overachievers are who filter through” – eFinancial Careers

Bootsraps Ain’t What They Used To Be
A great overview of social mobility and the role of education in the US – Brookings

Dubious Awards
Corporate America’s employees of the month: the Supreme Court – Bloomberg BusinessWeek

Primary Sources
The full complaint against MF Global, Jon Corzine, and Edith O’Brien – CFTC

Welcome To Adulthood
55 million good reasons to go to college – WSJ
Why the Fed isn’t helping the student loan problem – Shahien Nasiripour

The Fed
“If this plod-along thing is now the new reality, markets can handle it” – David Gaffen

Awesome
An oral history of “Trading Places” – Rob Wile

Good Ideas
The US will suspend trade benefits for Bangladesh – Reuters

Alternative Currencies
Man tried to extort Mitt Romney, demanded payment in Bitcoin – Politico

Your Retirement Plans
“Simple investors don’t realize it, but they have outperformed almost every hedge fund manager” – Josh Brown

To The Point
Nestle’s tactic for addressing Europe’s youth unemployment crisis: hire young Europeans – Reuters

Financial Arcana
Australia’s CDO-squared economy – Bloomberg View

Semantics
Language should literally be allowed to change – TNR

God’s Work
The Vatican starts to tackle financial reform – ABC

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