Felix Salmon

Student loans and fiscal policy

By Felix Salmon
March 26, 2010

I don’t even pretend to understand the parliamentary mechanism by which the long-overdue overhaul of the student loan system was pushed through inside a health-care reconciliation fix. Certainly that says a lot about how dysfunctional Congress is.

But it gets worse. Simplified, the question was what to do with the $60 billion or so over 10 years that the government will save by no longer subsidizing private student lenders through guaranteeing their loans. The Republicans, who wanted to keep the status quo, evidently thought that Sallie Mae et al were a great place to send that money. The Democrats, by contrast, thought it would be better spent on “federal grants to needy students and help fund other federal education programs, such as support for community colleges and historically black schools”.

You probably won’t be surprised to hear that I’m with the Dems on this one. (And so, interestingly, are a majority of Republicans.) But note what happens when the government finds a large annual savings somewhere in the budget: the money immediately gets spent elsewhere. As far as I can tell, no one seriously proposed that the private loan guarantees be abolished with the savings simply going towards a lower annual deficit. Right now, that money is (weirdly, indirectly, inefficiently) being spent “on education”, and so we have a bipartisan consensus that it should therefore continue to be Spent On Education going forwards, even if the original expenditure was wasteful and nonsensical.

And not just spent on education in general — the money must be spent on tertiary education in particular. Heaven forfend that savings from one part of the education budget might be spent on, say, shoring up holes in the K-12 area. When it comes to federal budgets, money is most certainly not fungible.

Politicians are always good at lauding inputs rather than outputs: you can be sure that Democrats will talk proudly, in the next election, at least to certain constituencies, of how they increased funding for community colleges and historically black schools. And they’ll do that regardless of whether or not the quality of education at those colleges actually improves. Which is why reducing government spending, even when we’re running a trillion-dollar deficit, is such an incredibly difficult thing to do.

Update: OK, this makes a little more sense: Matt Yglesias says that “some of the saved money is going to finance Affordable Care Act activities in the early years” — which means that it’s not all going into tertiary education, and that including the bill in the health-care reform process has at least some justification.

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Indeed, Matt’s observation is particularly salient with regard to the reconciliation process, which really only works if you get a net deficit reduction.

I can justify a fair amount of lumping together of seemingly unrelated things, but won’t bother to right now, though I will note that my fiancee has expressed the viewpoint that this particular lumping is one more reason she might leave the Democratic party. My response to this is that the process of legislation always makes “anybody else” attractive. (My brother has suggested the Republicans run a national campaign this fall with the slogan “Back into the Frying Pan”, which would certainly tap into one potential vein of support for them.) Perhaps this is an indictment of the institution of Congress and perhaps it’s unavoidable in any likely setup; kicking the bums out every couple years may not be a terrible idea, but it’s good to keep in perspective that the last set of bums wasn’t particularly attractive at the time, either.

Posted by dWj | Report as abusive

This is really offensive. If those savings really exist, which I doubt, they stem from the student borrowers being charged higher interest rates than is needed to fund the program. The proper way to deal with the excess would be to reduce student loan interest rates. Using that money for anything else is effectively a tax on student borrowers, including those who take out loans but do not get degrees.

If the savings do not exist – say, the federal employees needed to manage the program are more expensive than the bank employees they replace, or the government is less aggressive getting delinquent borrowers to pay up – that money is already spent, and the deficit just goes up.

Personally, I’d rather see the government get out of the student loan business altogether, either direct or guaranteed; and increase means tested grants instead. The evidence I’ve seen suggests that increased loan limits have gone directly to increased college costs, and the cost to students has continued to rise. The amount of debt graduates (and even worse, non-graduates) are starting their post-education life with is jsut horrendous.

Posted by MattJ | Report as abusive

“As far as I can tell, no one seriously proposed that the private loan guarantees be abolished with the savings simply going towards a lower annual deficit…”

I should f-ing well hope not. Of all the things driving our deficit problem, overgenerous support for education doesn’t rank among the top culprits.

It’s maybe best to think of these changes as slowing the momentum of a deteriorating situation – not stopping or reversing it. Agreed, this isn’t going to fix the quality problem by itself. But there is no way you’re going to make serious progress on the quality/value front *without* getting these rapacious, wasteful vultures out of the way.

http://www.nytimes.com/2010/03/26/us/pol itics/26loans.html?ref=politics :

“Still, the final bill is less ambitious than the original proposal.
“Although private banks will no longer be allowed to make student loans with federal money, many will continue to earn income by servicing those loans.”

“The bill includes some landmark changes… But for individual students, the increase in the maximum Pell grant…is minuscule, compared with the steep, inexorable rise in tuition for public and private colleges alike. And because college costs are rising so quickly, the maximum Pell grant now covers only about a third of the average cost of attending a public university… each year, more students graduate with debt of more than $20,000.”

“In the scaled-back, final version, the administration… mostly erased a $12 billion ‘American Graduation Initiative,’ which was announced with fanfare in the fall as an effort to bolster the work force by producing millions more community college graduates…and building up high-quality free online courses. Community colleges, the main provider of higher education for most low-income Americans, were slated to receive $10 billion… but will instead get just $2 billion for job training.

“If the new legislation had not passed, Obama administration officials say, Pell grants would have had to be cut to about $2,150, and some 500,000 students dropped from the program.”

When you look at overall education spending (incl. the stimulus & the Race to the Top initiative), they are taking a number of pretty forceful steps on the K-12 front. That said: it does sometimes seem like folks who haven’t had to deal with the system in the past decade don’t get the extent to which privatization and financial-sector interests, out-of-touch/overpaid administrators, U.S. News perverse incentives, etc., have polluted the landscape and hurt U.S. competitiveness.

http://www.theatlantic.com/magazine/arch ive/2010/03/how-a-new-jobless-era-will-t ransform-america/7919

http://www.pbs.org/newshour/bb/social_is sues/jan-june10/millenials_02-24.html

http://www.washingtonpost.com/wp-dyn/con tent/article/2010/02/24/AR2010022404264_ pf.html

Posted by j657 | Report as abusive

If you look at actual student debt profiles, there aren’t that many problems that couldn’t have been avoided by paying attention. Here are some of the most common types:

Student graduates in highly lucrative graduate field with huge amount of debt – law/medicine most obviously. Salaries are adequate to service debt if student doesn’t immediately buy Ferrari and 10,000 SF house. Some people do so, miss payments, then whine about how the system is unfair to doctors/lawyers (all the 35yo+ doctors/lawyers I know live in the nicest houses in their towns, drive nice cars, and send their kids to private school if they want to, but maybe somewhere else they have all the doctors on food stamps).

Student graduates with a marketable undergrad degree and a moderate debt load – education, nursing, engineering, etc. Salaries are adequate to service debt. etc.

Student graduates with an unmarketable undergrad degree and excessive debt load due to choosing the most expensive college, failing to take advantage of scholarships, and partying/joining pointless clubs rather than working a PT job in college. If you think it’s a good idea to take $100k debt to study English in a small New England town for 4 years, I don’t know how our society can help you, other than perhaps requiring an economics test before you’re permitted to take loans. At least if you can pass that you might be able to change careers or go to law/business school after you finish undergrad. I say this as someone who studied English – it’s a great field, but if it puts you in a negative net worth position heading into today’s job market it’s probably not the best idea.

For anyone with an education agenda that makes financial sense, Federal Direct Loans work fine and there are some reasonable private options too. For those whose education agenda does not make financial sense, I recommend any of the following options:

1. Get a job.
2. Go to community college.
3. Study something that someone wants to pay you to do.
4. Get a scholarship.
5. Marry up.

On the specific deficit point, our government is now semi-permanently parked in the mental zone of a bank that has lost money all year and now faces an upcoming negative 4Q. There’s no reason to work harder, cut costs, or create some revenues to fix the P&L – no one is getting a good bonus. Instead, everyone works to curry favor, maximize whatever perks they can draw, keep their job, and set up for the magical time in the future where everything will spontaneously get easy again. What sort of political capital do you get from “Yeah I voted to hack your benefits, but now our deficit is 1.2 trillion instead of 1.5 trillion”? Much easier to go back home with “Sure times are tough and there are some problems to fix, but this deficit should be about as bad as it gets. Here’s a check, and we have some plans to create jobs for y’all next year”.

Posted by najdorf | Report as abusive

najdor –

Where can one find those “student debt profiles”?

Posted by slowlearner | Report as abusive

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