Obama Wants Taxpayers To Pay For For Student Stimulus

Obama will roll out a plan to put more money in the pockets of some of the nation’s 36 million student loan recipients. Obama has broad latitude in this area – certainly broader than the first two parts of his western campaign trip, underwater mortgages and subsidies for hiring veterans – because one of his early legislative initiatives was to have the federal government take over the student lending business in America. Obama argued for the measure in 2009 as a cost-savings initiative, saying that the old system of privately issued, government secured loans reduced the amount of available money for needy students and also prevented the feds from making the system more efficient.

Federal student loans have advantages over private loans. For example, interest on the loan is tax deductable, the loan can sometimes be forgiven for certain types of service, and you can sometimes defer payments on the federal loan if you go back to school. Private loans don’t have these advantages – they are really just loans either secured or unsecured, and you have to pay them back just like any other loan. It’s important to not consolidate federal and private loans together. Consolidate all your federal student loans first, then separately consolidate your private loans. If you were to mix the public and private loans you would have to take out a single private loan that loses all the benefits of the federal loans. Keep government student loan consolidation separate from private loan consolidation.

Obama is now seeking to use that new power to obtain a taxpayer-financed stimulus that Congress won’t approve. The idea is to cap student loan repayment rates at 10 percent of a debtor’s income that goes above the poverty line, and then limiting the life of a loan to 20 years. Take this example: If Suzy Creamcheese gets into George Washington University and borrows from the government the requisite $212,000 to obtain an undergraduate degree, her repayment schedule will be based on what she earns. If Suzy opts to heed the president’s call for public service, and takes a job as a city social worker earning $25,000, her payments would be limited to $1,411 a year after the $10,890 of poverty-level income is subtracted from her total exposure. Twenty years at that rate would have taxpayers recoup only $28,220 of their $212,000 loan to Suzy.

About 50% of recent college graduates took out student loans, with an average borrowed around $10,000 (ref. 3). In the last three years, rates have fallen very low. As of fall 2003, Stafford loan interest rates were in 3-4% range (ref. 2). Consolidation interest rates can be much lower (under 2%), but this comes with very specific requirements – like good repayment history. Like any debt, student loans can influence your credit and your future decisions. Students who borrowed a substantial amount for college (more than $5000) are less likely to pursue higher education (ref. 3). In addition, student loan debt that exceeds 8% of your income can be seen negatively when your credit gets assessed for future loans. Two ways to reduce the debt burden are: 1) reduce or eliminate the principal balance. Specific types of loans can sometimes be forgiven by service or other higher education – look into the specific student loan program you have. 2) Reduce your monthly payment. Since debt burden is measured by comparing your loan payment to your income, reducing your payment helps your credit evaluation.

Obama will also allow student debtors to refinance and consolidate loans on more favorable terms, further decreasing the payoff for taxpayers. Obama’s move comes at a moment when many economists are warning of a college debt bubble that is distorting college tuition rates and threatening to further damage credit markets. The president’s move is intended to make college more affordable for more people, which will, in turn allow universities to jack up their rates. As in the housing bubble, cheap credit on easy terms increases the amount of money chasing the product (in this case a diploma) allowing schools to increase prices. This inflation makes it harder for middle-class families to afford paying their own tuitions, driving them into the government financing program, which, you guessed it, drives up costs further still.

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York, the U.S. Department of Education and private sources. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years. Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can’t be shed in bankruptcy.

The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future. Full-time undergraduate students borrowed an average $4,963 in 2010, up 63% from a decade earlier after adjusting for inflation, the College Board reports. Obama’s goals, aside from continuing to encourage young people to spurn the private sector in favor of service jobs, is to try to juice the economy. Those who participate in the program could see their monthly incomes rise by hundreds of dollars, thereby increasing the money they have to buy stuff and try to juice the economy. A more modest program already in place has been a bit of a bust with only 1.25 percent of debtors signing up, likely because of the unpleasant notion of additional paperwork and government reporting hassles. But by sweetening the deal and putting a big PR push behind it, Obama is betting that he can get people spending in time to help shore up his re-election chances.

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