Economist Peter Schiff, who was among the first people to publicly predict the collapse of the housing bubble, writes here about Obama’s student-loan gambit. Just like his politically motivated interventions in the housing market, this is just going to prolong and deepen the problem — too many people going to college largely at the expense of others, then struggling to find jobs that pay enough to cover the debts. Many will never find such employment since the labor market doesn’t automatically create high-paying jobs just because more people have a “higher attainment” in formal education. Then the costs are passed along to taxpayers. Obama’s move might reap him some political benefit, but it will lead to more wasted resources. This is another lesson in Bastiat’s “seen and unseen.”
This was big (and alarming) news yesterday. I'm hoping to see commentary from an NRO contributor soon.
If someone is working on a column, please consider: Does the President have this authority? A private bank can certainly choose to negotiate with a lender for partial forgiveness of a loan gone bad. Do the GSEs have that authority under the laws that created them? Is there any equivalent to collateral in student lending? Any way to transfer the risk of incomplete repayment to the institutions of higher learning?
Reply to this commentLinkReport AbuseI think it's part of a long game to be honest.
"You want loans to go to school? You need to study X (say medicine), because there is a shortage of X. Oh no, you can't get private loans, we shut that route off some time ago."
"You have your MD and want to be a heart surgeon, but with nationalized heath care, can't make enough as a surgeon to pay off those government controlled student loans? Tell you what, spend 20 years as a GP in this poor community, and you can have all that debt forgiven. You didn't want to be a GP? Should have thought of that before taking the loans."
Reply to this commentLinkReport AbuseSome kids are graduating with huge student loan debts, often exceeding $100,000 and I’ve read of cases topping $250,000 for law and medical school graduates. That’s the price of a good home in many parts of the country.
Now, imagine we were talking about home mortgages instead of student loans. Suppose Obama offered home buyers the same deal – you can buy whatever home you want and your payments will be limited to no more than 10% of your income for 20 years. Any mortgage balance after 20 years gets forgiven – meaning it’ll be picked up by the taxpayers. What do you suppose the outcome would be? Instead of trying to buy a home people could afford, everyone would try to get a mansion. Instead of trying to build homes people could afford, every house would be priced like a mansion. There would be no incentive to control costs and prices would skyrocket.
If Obama’s plan goes through, the same thing will happen in education. Kids will stay in school longer and run up ever higher debt. Since the payments are capped, it doesn’t matter if they have $100,000 in debt or a million dollars in debt for that double doctorate in Womyn’s Studies/Basketweaving – they aren’t going to pay for it. Colleges will continue their massive increases in prices because there is no incentive to control costs (even worse than today). The taxpayers get stuck with the bill, the academics prosper, and society gets more graduates with worthless degrees. How this benefits socieity is a proof left to the reader.
Reply to this commentLinkReport AbuseCan it still be stopped? I followed George's other link which informed that the law, the IBR, went into effect in 2009. Maybe, I'm not sure, the President already has the authority to make these changes under current law. It will probably require a change of administration to roll this back and by then there will already be a dependent client base.
Reply to this commentLinkReport AbuseBeen working in student loans for just shy of 25 years. It was incredibly unclear, but Obama actually announced 2 separate intiatives yesterday.
1. For borrowers who have a student loans held by the Department of Education and a Federally guaranteed loan held by a private lender, Obama promised to buy the loan held by the lender. He promised up to 50 basis point reduction in the interest rate. However, half of that is for signing up for automatic withdrawal. (Borrowers already get that same discount for automatic withdrawal from these lenders.) The statutory authority to buy these loans and to offer the discounts is, um, unclear.
2. The second initiative was to implement some repayment provisions that by statute are contemplated to be effective in 2014. These provisions would only apply to loans held by the Department of Education. How they can be implemented early is again, unclear (to say the least.)
Something that gets missed is that these Income Contingent Repayment plans were supposed to be revenue neutral. (Easy enough, just figure out human behavior for 20 -25 years. What could go wrong!) In addtion, whatever amount remains at the end of the repayment period is "forgiven" but ... it is a taxable event. So the borrower moves from the soft hands of the Department of Education to the iron maw of the IRS. There is a legislative effort afoot to remove the tax consequences of forgiveness, but so far no cigar.
Reply to this commentLinkReport AbuseSoft hands of the Department of Education? You are out of your mind. The consequences of defaulting on a DOE loan are very harsh. The DOE contracts out its collection to private firms, some of which are incredibly sketchy even by debt collection standards. There are numerous horror stories of students elderly grandparents being threatened with legal action (even though they have no legal liability). Unlike tax debts, student loan debts are almost never discharged in bankruptcy,so the lenders have no incentive to negotiate an achievable payment plan.
The long term solution is to put the university on the hook for a significant portion of loans that are not collected either due to default or to Income based Repayment (IBR). Also schools with a high proportion of defaulting students and students on IBR should lose their ability to grant federally backed loans. If this can't be done than the whole student loan system ought to be scrapped.
Reply to this commentLinkReport AbuseSoft hands of the Department of Education? You are out of your mind. The consequences of defaulting on a DOE loan are very harsh. The DOE contracts out its collection to private firms, some of which are incredibly sketchy even by debt collection standards. There are numerous horror stories of students elderly grandparents being threatened with legal action (even though they have no legal liability). Unlike tax debts, student loan debts are almost never discharged in bankruptcy,so the lenders have no incentive to negotiate an achievable payment plan.
The long term solution is to put the university on the hook for a significant portion of loans that are not collected either due to default or to Income based Repayment (IBR). Also schools with a high proportion of defaulting students and students on IBR should lose their ability to grant federally backed loans. If this can't be done than the whole student loan system ought to be scrapped.
Reply to this commentLinkReport AbuseI'm very familiar with collection in the student loan industry. The "soft hands" comment was tied to the borrower's continued enrollement in the Income Contingent Loap repayment program. This program focuses on minimal payments. If you have a pulse you can avoid making any substantial payments for a very long time.
Reply to this commentLinkReport AbuseBecause I graduated from an extremely expensive private school 20 years ago - and paid back my loans within 5 years of working, - I find myself wondering how it is that none of the animus among these children - and lefties in general - is focused on academia itself?
Clearly it would be too much to expect any of them to grasp the economics of why college has escalated in price, but the past and present costs are what they are. These people seem perfectly capable of noticing that a school which was $20K in 1990 was subsequently $50K in 2010. Yet, somehow, we have what's perhaps the only instance of lefties not applying their juvenile math toward being outraged at the seller.
Reply to this commentLinkReport AbuseAbe, I agree with you on their inconsistency but remember the teachers and administrators are predominately liberal so they don't want to criticize themselves. It seems like the problem is as much a matter of the high cost of exorbitant personnel costs which benefit the left leaning establishment both in access to the students and high salaries to benefit themselves as it is that there are no high paying positions after the post secondary education to cash flow the repayment. But no one wants to criticize or even consider that part of the equation. Only the current president could get away with charging more than 6% to students on money that costs the government (of course until you figure in the useless bureaucrat to run it and those bloated costs) anywhere from less than 1% to 2 % and then use the student interest money for his own pet projects (possibly including more Pell grants which is unfair to the student paying the loan to have to also pay for another student or students at the same time) while acting like they are helping students. "Up is down and down is up" in the president's world and the media allow or supports this..
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