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Student Debt Deal

[ 40 ] July 20, 2013 |

As you may have heard, 8 Senators have come to an agreement on student loan rates that is blessed by the White House. On July 1, thanks to our dysfunctional (nonfunctional?) political system, the interest rates for student borrowers jumped to an absurd 6.8%. The White House immediately pressed for a system that would tie student loan interest rates to what the government pays to borrow money. As with much of his education agenda, this was a terrible idea from the Obama Administration and basically ceded ground to the Republicans. Senate Democrats were angry and initially rejected such an idea, but what could they really do in the end? The typical college undergraduate borrowing $27,000 (which is an insane amount of money right there) will pay an extra $300 in interest under this system.

Some Democrats such as Diana Carew at the Progressive Policy Institute are calling this a “reasonable compromise.”
I don’t really see it that way. Carew is right that relatively small changes in interest rates is not the biggest driver of student debt. Yet the interest rate on student loans should be 0.0%. That should be the progressive policy position. Republicans and some Democrats have talked of the extra revenue raised by the rise in student loan rates. The government should receive absolutely no profit from the student loan system.

This is one of those small victories for Republicans that add up to make our lives worse and worse, one day at a time.

Comments (40)

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  1. Another Anonymous says:

    Problem is, the whole program is fucked, and lower interest just encourages more borrowing, more tuition hikes, etc.

    I don’t know how to solve it, but as this blog’s law-school posts keep reminding us, it’s a real problem.

    • Erik Loomis says:

      I don’t think lower interest rates really encourages more borrowing. I doubt students are making many choices based upon interest rates, even between 3% and 6%. They are deciding whether they can afford the cost of tuition.

      • Lee Rudolph says:

        Exactly. Effectively (well, actually, if one ignores inflation/deflation), “borrowing at 0%” is equivalent to “deferring payment”—the payment still has to be made, eventually, and deciding whether that payment (rather than some even larger payment) will ever be affordable is still something that a potential student has to do.

      • Ed K says:

        This seems right to me.

        There is no question, however, that a lot of institutional financial decisions (and much of the prestige-race of the past several decades, which has been fueled by all kinds of non-academic capital spending) have been driven by question: ‘how much federally guaranteed student debt can we capture?’ A related phenomenon has been privatization or outsourcing of many school functions, thus giving rise to ‘how much federally funded student debt can we redirect toward our for-profit friends?’

        Doing something about the impact of all this debt on the poor bastards (myself included) who are buried under it is a serious issue. Figuring out something less poisonous as a way of funding higher education, especially public higher education, is a different but equally important issue.

        • Ed K says:

          To clarify, the principle that the government shouldn’t be profiting on these things is absolutely correct. A-greed. Wholeheartedly.

        • howard says:

          of course this is right: the underlying system encourages colleges to charge more.

          this is a classic cost of good intentions problem, and the heart of the problem isn’t the rate of interest, it’s the size of the principle.

          even if i agreed that interest should be zero, without some other changes student loan debt will still be crushing, and focusing on the interest rate rather than the underlying size of the loan is a forest/trees vision problem.

          • Ed K says:

            I don’t agree at all.

            Compound interest is a huge part of why it’s impossible for people to get out from under these things, especially when they have to take deferments and add interest to principle.

            The student borrowing model of HE funding is a separate problem. The interest rates on loans thing is real, urgent, and needs to be dealt with.

            • howard says:

              edk, fair enough: for people in midstream, so to speak, it matters whether the water is rising or lowering.

              but the heart of the problem is the obscene cost of college (you wouldn’t be worrying about compounding if you didn’t have $20K in debt in the first place, so to speak), and even a zero interest rate program wouldn’t solve that problem and might even exacerbate it….

              • Ed K says:

                Not sure why you’re presenting this as an either-or choice, especially given that zero or reduced interest will do an enormous amount to help an awful, awful lot of people swimming in debt (especially the ones who are having real difficulties repaying).

                There isn’t a single reason we can’t both stridently advocate for doing something about the conditions of that debt (and really, stop thinking in terms of 20k, think in terms of 50-100, which lots of folks have, and then think about compound interest), while also looking at the cost of university / the funding model.

                More importantly, neither of these problems is, as a practical matter, *more fundamental.* They’re both urgent. If you don’t see that, you really don’t get how bad the debt thing is.

      • Anonymous says:

        Certainly the gov’t should not be making money on these loans, which by one report it is.

  2. Some Guy says:

    I’ve been paying 6-6.8% on a 20K loan for two years now, so I don’t want to hear it.
    I don’t agree that the rate should be 0, but I do think that your full tuition payments should be deductible, not just the interest.

    I don’t think a higher % would have a negative impact on the number of people going to college, at least not right away. But it has taught me the valuable lesson that I’ll never be able to buy a car, ever. So that should be good for the economy, right?

    • crabs says:

      another installment of ‘why we cant have nice things’

    • Josh G. says:

      I’ve been paying 6-6.8% on a 20K loan for two years now, so I don’t want to hear it.

      So have I. (Well, about four years, actually – and I only managed to keep it as low as 20K because I started college with a small nest egg from a lucky real estate sale.) And I still would rather see new graduates not have to suffer through this crap.

      The fear that someone, somewhere might be getting a better deal than we are (a fear which mysteriously is somehow never applied to the rich and powerful) is one of the major drivers of bad public policy in America.

      • CaptBackslap says:

        Flawless victory. The whole GOP game these days is to stir up ressentiment toward people who still have the things that used to be considered standard-issue for the middle class.

        The sad part is how well it works.

  3. borrower says:

    I don’t have a problem with the government making enough money to cover the cost of administering the program but $700M over 10 years is absurd.

  4. Informant says:

    I’m not saying that 6.8% is the correct interest rate, but the rate in my view should be set at a level that makes the program self-financing, which necessitates a higher than 0% interest rate.

    • Erik Loomis says:

      I can certainly accept a system charges enough interest to pay the costs, although the government should just subsidize the whole thing.

    • Josh G. says:

      Why should it be self-financing? We, as a society, have decided that the only way to get a decent middle-class job is to graduate from college first. I think that’s a terrible idea, but it is what has happened. That being the case, it’s absurd and cruel to require everyone to saddle up on debt to get their degree. If we’re going to effectively mandate it, then college should be free, just as high school is now.

      • joe from Lowell says:

        To the extent that we, as a society, are going to subsidize the cost of college, why go through the Rube Goldberg process of running those subsidies through the lending program, instead of putting that money into Pell Grants?

        • PBL says:

          You would need to drastically increase eligibility for Pell Grants if you want to reach more than about 25% of college students. Outside of the UC system, most selective state schools have an undergraduate population which is less than 25% Pell Grant students and at privates it is closer to 13%. I would rather increase the award amount for current Pell Grant students than to expand eligibility up the income scale.

          Currently, about 40% of students receiving subsidized loans are from families with AGIs over $50K so it is already set up to assist middle/upper middle class students to an extent.

  5. Manny Kant says:

    Erik – I certainly agree with you on the basic position that student loans shouldn’t charge more interest than will give them enough money to administer the program.

    That being said, I don’t see why you should criticize the White House for agreeing to a deal that might actually pass the House. Obama’s job isn’t to outline the ideologically correct position. It’s to actually shepherd the best possible deal through this Congress. The alternative to this deal is not a 0.0% interest rate on student loans. It’s a 6.8% rate, which would be terrible.

    • Erik Loomis says:

      The alternative to this deal should have been the same rates as before. This situation should never have happened to begin with but when it did, an extension of the status quo was a superior position to Obama’s.

      • joe from Lowell says:

        an extension of the status quo was a superior position to Obama’s.

        A 6.8% interest rate is superior to a lower interest rate?

      • joe from Lowell says:

        an extension of the status quo was

        …not available. The status quo was sunsetting. The scheduled increase to 6.8% was the status quo.

      • Manny Kant says:

        But that was not the alternative. You get 6.8% or you get whatever the House is willing to pass.

    • Ed K says:

      Actually, at least part of O’s job needs to be to outline some ideologically correct positions and advocate for them. His unwillingness to even articulate dissatisfaction with really crappy compromises is a real issue.

      • Scott Lemieux says:

        Yes, if there’s anything that has generally characterized successful presidents it’s attacking legislation they sign as terrible. Plus, doing that would change things because something something.

        • Ed K says:

          Fair enough, but he’s also got this thing called the veto that he could actually threaten to use once in awhile, even and especially if they override him.

          But all of this is, of course, moot since all signs indicate that Obama actually likes and wants most of the horrible compromises that he signs. They seem to reflect his actual policy goals.

          • Manny Kant says:

            Again – vetoing a student loan deal means the rate goes up to 6.8%. If the House isn’t willing to give Obama what he wants, he needs to sign whatever compromise they are willing to pass.

            • Scott Lemieux says:

              Right, this is even sillier. So he threatens to veto the ACA because it isn’t single payer. So now what? If no legislation passes, to Bayh, Nelson et al that’s perfectly fine.

  6. joe from Lowell says:

    Erik is so opposed to borrowers paying that extra $300 that…he thinks the White House should have allowed rates to rise to 6.8%.

    Okay.

    • Erik Loomis says:

      Yes, that’s exactly what I said Joe.

      • joe from Lowell says:

        Yes, it is.

        You used different words to make it look less stupid than the position actually is, but yes, that’s what you are arguing.

        • Erik Loomis says:

          Joe,

          Sometimes you are truly an obfuscating idiot.

          In case I need to lay this out for you, since your Obama hackery won’t let you see straight, what I said was that Obama immediately ceding the point to the Republican position was a terrible idea. If you propose the status quo and then you can’t get it and you have to backtrack to something like this, maybe that’s what you do. But Obama’s entire education policy is effectively a Republican policy so no one is surprised he did this. However, at the very least, he perhaps could have wrung more concessions from Republicans rather than separating himself from his own party on this.

          I guess your obsequious love for Obama gets in the way of you realizing that almost the entirety of the Democratic Senators opposed Obama doing this and were quite frustrated by his actions as well. But then I guess they are all stupid like I am.

          • joe from Lowell says:

            After I hit post, I thought there was a 99% chance you would respond with “blah blah blah Obot” and personal insults, and a 1% chance you would respond with something substantive.

            In case I need to lay this out for you, since your Obama hackery won’t let you see straight…

            Yawn. Old dog, no new tricks.

          • joe from Lowell says:

            I have very little trouble believing that most Democratic Senators are as stupid as you are, though I doubt they are as emotionally fragile.

            If you propose the status quo and then you can’t get it and you have to backtrack to something like this, maybe that’s what you do. But Obama’s entire education policy is effectively a Republican policy so no one is surprised he did this.

            Ah, my two favorite internet stupidities, rolled into a neat package. “The Republicans have to meet you half way if you propose something extreme,” with a heaping dollop of “If Barack Obama doesn’t use my negotiating strategy, it means he’s secretly siding with the Republicans.”

          • shah8 says:

            While I’m a little sympathetic to your point, Erik, from the quick reading through the links, it seems like it was an uphill battle for an engaged Administration just to get the interest rate decrease as it was.

            The status quo was indeed the initiation of the 6.8% rate, and this would indeed have caused a great deal of pain to tens of thousands or more of Americans. In said context, you have to suggest or link to someone who suggests an alternative pathway in the currents provided by that mandated increase of the interest rate. With the knowledge that the Administration genuinely spent material political capital just to get this much.

  7. [...] of course agree entirely with Paul and Erik on the merits of the new student loan plan, but I respectfully disagree with them on the [...]

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