Student loans: Exploiting America’s young

By Douglas Holtz-Eakin
July 1, 2013

President Barack Obama talks about the rising costs of student loans while at the University of Iowa in Iowa City, April 25, 2012. REUTERS/Larry Downing

Obamacare was paid for on the backs of students.

You may remember that Obamacare staggered over the legislative finish line in 2010 with $19 billion in profits from changes to the student loan program. The changes included nationalizing federal student lending and setting loan interest rates high enough to generate profits to cover the healthcare costs.

Monday, President Barack Obama and the Democratic-led Senate again put their political and legislative priorities ahead of students and allowed their loan interest rates to double.

This student loan episode cements the Obama administration’s continuing pattern of economically exploiting  younger voters. Because of the Obamacare-created Federal Direct Lending Program, a 2009 freshman who qualified for federal subsidies and borrowed the maximum Stafford Loan every year will graduate with a financial penalty of over $400 more in debt than if markets had set interest rates. A more affluent freshman, who did not qualify for subsidies, will carry an additional $1,400 in debt. Meanwhile, a graduate student, who entered a three-year program in 2009, will be facing nearly $3,400 more in debt as he or she seeks to launch a career.

In passing Obamacare, Washington took its eye off the economic recovery. As a result, the unemployment rate for workers aged 20 to 24 remains stubbornly above 13 percent; the rate for those ages 25 to 34 is more than 7 percent, and the duration of unemployment remains at levels not seen since the Great Depression.

The House of Representatives recently passed a bill shifting student loans back to market-based interest rates. The advantages of this approach are so evident that even President Barack Obama advocated it in his budget proposals.  Kudos to the White House for recognizing that price-fixing is never a good idea.

The House bill reduces current rates for all college borrowers and saves students up to $1,413. At the same time, it reduces the drain on taxpayers by roughly $4 billion over the next decade. It also insulates the program from the machinations of bureaucrats setting arbitrary rates.

Sounds all good.

Unfortunately, the Senate failed to act — preferring the status quo, They are willing to kick the can down the road for another couple of years. As Senator Tom Harkin (D-Iowa), the chairman of the Senate Health, Education, Labor and Pensions Committee, stated “Let’s put this off for a year.”

The White House failed to lead, changed positions from its budget-proposal outline and caved to the Senate — embracing its central planning approach.  This after the House passed a solution in line with the president’s own budget, and some Senate Democrats expressed support for this solution.

The resulting stalemate means that interest rates will now be fixed at 6.8 percent. This may be good politics for some. But there is one clear loser: students.

Let’s hope that the young find jobs soon. After all, they’re now expected to pick up yet another tab. Federal debt has exploded since 2009 and is projected to nearly double to $19 trillion in another 10 years.

It used to be said that federal debt was a problem for future generations. But no longer.  The interest alone will become a federal agency as large as the Pentagon in 10 years. Unless young Americans actively control the debt over the next two decades, the economic damage will be incalculable.

It is a bleak picture and at odds with the administration’s popularity with young voters.  Perhaps the bloom is finally off the rose.

The same Obamacare that resulted in higher loan rates for students is built on a foundation in which young Americans are forced into insurance pools that subsidize the coverage of the older and sicker. To do so, it will likely raise the health premiums of young Americans dramatically. As health insurance premiums rise, fewer will buy insurance. Indeed, if the premium increase shock is an all-too-plausible 30 percent hike, 45 percent may just pay the tax penalty and stay out of the insurance pool.

In light of this pattern of economic abuse, the intransigence of Senate Democrats on a permanent fix to the interest costs on student loans is not surprising. But it is no less costly to young Americans.

 

PHOTO (Insert): President Barack Obama shakes hands before he speaks about the rising costs of student loans while at the University of Colorado at Boulder in Colorado, April 24, 2012. REUTERS/Larry Downing


27 comments

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@ Decatur –

You are obviously directly involved in education, judging by the focus of your comment.

However, I must take strong exception to what you are saying for the following reasons:

———————————–

(1) You state “The trends supported by the right are concerning for our future, as 300 million Americans hope to prepare our kids to be the ones rewarded when competing with a global middle class that will apporach 3 billion in their lifetime”.

I am not sure who you mean exactly by the “right”, since our entire government is actively involved in cheating future generations of a chance for any kind of decent life, much less that of the anomalous “middle class” that is fast disappearing.

The argument of “competing with a global middle class” is a strawman argument to distract the American people from the fact that our main problem with education is our own government.

I have said before in previous comments that there is no economic reason why the US elite should improve our school system when it is much cheaper to simply (a) export jobs to a third world country, or (b) for those jobs that cannot be exported, to import cheap labor from the “global marketplace”.

The solutions to our incredibly poor “educational system” do not lie within the school system as most would have you believe (e.g. poorly trained educators not up to the task), but with the ability of the elite class to shift jobs and labor at will.

There is absolutely NO WAY the US educational system can EVER “compete” with the global labor market.

To give you an example, Walmart employment policies are a good proxy for what is happening to the US economy. They hire at the lowest wage possible, with no benefits and utilize “part-time” labor as much as possible.

THIS “Walmart Model” is where the US educational system is taking us — to a system of low paid workers with an extremely high percentage of “temporary” employees — who would function like “seasonal workers” hired by companies when they need additional labor (e.g. I used to use “Manpower Inc” to fill temporary accounting positions during audit season), then simply let them go after they are no longer needed.

THAT is the IDEAL WORKFORCE for ANY company for jobs that cannot be outsourced overseas — no lengthy job search, health care and benefit packages, vacation issues, or potential problems when an employee doesn’t work out (legal issues) — ALL aspects of hiring employees which cost money (i.e. lost profits) for the company.

THIS is what the free market system is doing to US education, and the American people are apparently too stupid to understand that the ONLY thing companies care about is PROFITS.

WHY, when the entire work is a “temp agency” would they willingly choose to invest in US schools?

(2) You state, The rise of smaller private colleges as student loan mills” to which I agree, and is proof of my accusation, since NONE of these people will EVER get decent-paying jobs and a future as a result of their efforts, but only MASSIVE amounts of student loan debt.

(3) You state “The disincentives for higher education of any type unless you can ‘borrow from your parents’” which is absolutely true, since from an elite point of view, their children are the future leaders of this nation, so why should they deliberately undercut their the future of their children by funding a school system of those who are not “leadership material”?

The huge reduction in school funding for higher education that you see now compared to a few decades ago is literal proof of what I am saying.

(4) You state “The false choices, like having to choose between better english, or science math and gifted programs (we need both, especially here in the southwest where better english would lift more kids up into life-long higher achievement).”

NO child should be allowed into our school system who is not fluent in English.

ANY argument to the contrary is NOT sufficient reason to justify holding back those who are fluent in English, since it handicaps them right from the start and many never catch up.

THIS is probably THE MAJOR reason why our school system is struggling — we have deliberately dumbed it down to the lowest common denominator, and then we whine because our school systems are so poor.

Attempting to create a level playing field at the lowest common denominator level will destroy the future for any child who is forced to hobble along at that level. We are deliberately forcing our children to become mental cripples, all for the sake of some idealistic “multicultural” bullshit.

(5) You state “The backwards anti-science bias and even rewriting of history (less Jefferson in Texas books) that politicians force onto schools, we’re not justanti-evolution and anti-climate science, we’re even anti-metric.”

ALL of these problems would immediately disappear IF we had a strong, uniform system of education.

Needless to say, we must remove religion, or religious-based teaching from the school system.

(6) You state “We had great success with two generations of easier access to higher education: the GI Bill and the middle class wages of the GI Bill adults that schooled the next generation. Now in the face of growing competition, we shoudl be vigorously promoting competition to raise up new inventors, engineers and entrepeneurs, not raising barriers to schooling.”

TRUE!

And we as a nation are doing our level best to make sure that NEVER happens, mainly by refusing to face the reality of what the world has become.

Posted by EconCassandra | Report as abusive

I have made the same argument as my reply to Decatur several times before, but have NEVER received any response.

Is there ANYONE out there who understands what I am saying, or are you all so wrapped up in your elitist love affair that you cannot see she has warts, and is ugly as sin.

Or has our “educational system” finally succeeded in producing only people who are incapable of rationally realizing what the problems really are?

Posted by EconCassandra | Report as abusive

Thanks for lengthy reply.

I almost entirely agree with you Cassandra.

We underprioritize education and thus shortchange our future. Education is seen as a threat by some economic and religious fundamentalists who like the status quo, or maybe like the 19th century even better. We need the modern combined equivalent of GI Bill, Sputnik scare and greatest generation national focus to make sure that our kids are smart enough when they grow up to a world where each American has 10 or 20 educated peers, so they are looked to by the world for knowledge and solutions, so they ‘add value’ and can export ideas, expertise, continuing the tradition of ‘American know-how’.

We undercut educators (the teachers we hold responsible for our kids performance) by lumping them in as bad guys with the current anti-government rhetoric. This is where I disagree with you.

Education is being undercut by greed (not wanting to pay taxes for some kid who’s not in your family, but could someday be your doctor, the designer of your nursing home, or pilot the plane you fly in); and ideology where privatization is always better even when charter schools track records are their own can of worms, no panacea alternative to public schools. Yes, I wish we emphasized english more vs. multi-lingualism in education and in media and commerce, but we can get there faster by expanding english to get kids to where they are fluent and can go on to do their best in other topics – especially STEM. So I think funding ESL/ELL vs STEM vs band/art etc., in many State government debates are false choices – we need to give our kids’ brains all those areas of knowledge and experience.

I don’t work in education (I do volunteer some) but as a parent of kids going to magnet schools and a technical worker, I care a lot about the neglected condition of education and the imapct I fear it will have on our economy. Cutting education funding, or adding barriers like more expensive student loans, is a classic example of ‘being penny-wise and pound-foolish’, or taking far too short-term a view of the topic.

Posted by Decatur | Report as abusive

Thanks for the reply Cassandra.

I almost entirely agree.

We under-prioritize education and thus shortchange our future. Education is seen as a threat by some economic and religious fundamentalists who like the status quo, or maybe like the 19th century even better. We need the modern combined equivalent of GI Bill, Sputnik scare and greatest generation national focus to make sure that our kids are smart enough when they grow up to a world where each American has 10 or 20 educated peers, so they are looked to by the world for knowledge and solutions, so they ‘add value’ and can export ideas and expertise, continuing as best we can the tradition of ‘American know-how’.

We undercut educators (the teachers we hold responsible for our kids performance) by lumping them in as bad guys with the current anti-government rhetoric. This is where I disagree with you.

Education is being undercut by

1) greed (not wanting to pay taxes for some kid who’s not in your family, but could someday be your doctor, the designer of your nursing home, or pilot the plane you fly in);

2) ideology where privatization is always better even when charter schools track records are their own can of worms, no panacea alternative to public schools; and

3) local politics pandering to ignorance or ideology, re-trying the Scopes trial over and over at a county level.

Yes, I wish we emphasized English more vs. multi-lingualism in education and in media and commerce, but we can get there faster by expanding English teaching to get kids to where they are fluent, become ‘mainstream’ even if they started as immigrants, and can go on to do their best in other topics – especially STEM. So I think funding ESL/ELL vs STEM vs band/art etc., in many State government debates are false choices – we need to give our kids’ brains all those areas of knowledge and experience.

I don’t work in education (I do volunteer some) but as a parent of kids going to magnet schools and a technical worker, I care a lot about the neglected condition of education and the imapct I fear it will have on our economy. Cutting education funding, or adding barriers like more expensive student loans, is a classic example of ‘being penny-wise and pound-foolish’, and taking far too short-term a view of the topic. Eisenhower’s comparisons of society being shortchanged the cost of schools or hospitals vs. added squadrons of missiles or jet bombers are just as valid today as they were 50+ years ago. Back then it was argued to moderate defense build-up from growing at the cost of domestic needs, today it should be argued that gutting education is a cost we can’t afford for the sake of austerity, making it instead our priority to maintain the lowest tax levels in generations.

Posted by Decatur | Report as abusive

What a dishonest article. “The machinations of bureaucrats setting arbitrary rates?” “Price fixing?” Students should get loans at the same rates the Wall Street fat cats got from the Fed when they were bailed out, just as Senator Elizabeth Warren has suggested.

Posted by bluepanther | Report as abusive

I have a theory.
I believe the government with the help of wall street bankers have bundled up student loans like they once did mortgages and sold them on the market. These “junk bonds” are then used to service off our governments debt obligations abroad mainly to China.
Why? These loans are unforgivable which was different from the mortgage crises when many of the loans went into foreclosure and ultimately wall street had to write these loans off and as you know led to the financial meltdown of 2008-2009. Today, the student loans are more secure due to the unforgivable terms. Also, if the student loans go into default the government can seize your tax refund in the event you have one. Student load debt has been reported to be upwards of 1.1 trillion dollars. Student loan rates have risen and congress has yet to take action. I believe the rate is from 5% – 8% based on information gathered from the(Federal Student aid Dept.) which is twice the amount of the current national rate for non-secured debt ,reported by the Federal Housing Finance Agency (FHFA) of 3.35 percent based on loans closed in January. Lastly, debtors are for the most part young and the chances that they will find careers were they will be able to service their loans at some point in time is worth the wait. Its a catch-22 you can put it off, but if you do it will rear its head when applying for a mortgage or purchasing a car. Your rate will be higher or will not be approved all together. So you better pay that loan off. So given this conspiracy, what is the likely hood of student loan reform? None to little cosmetic changes. It already been bundled and sold!

Posted by DariusByRemote | Report as abusive

The federal loans are the best thing that happened to students. They don’t pay the whole cost, but carry a 6.8% FIXED interest rate. That means less from JPMorgan at 11%

The $2500 tuition tax credit was also the only way I had the minimal food budget I had in college. Dark days, they were. Federal loans are much, MUCH nicer to you in repayment as well

Posted by dustyred14 | Report as abusive