The first thing that went wrong here occurred seven years ago, when Congress decided to pander to college students and their families by passing a temporary reduction of student loan interest rates to 3.4 percent. Congress wrote the lower rate to expire, and a rate of 6.8 percent to return five years later, because Congress always does that to mask the true long-term costs of such panders. They extended the rate in 2012 for one yet, but could not reach a deal to extend it again this year, so the 6.8 percent rate is back, much to the consternation of the panderers in Washington.
The next thing that went wrong occurred three years ago, when President Obama took student loans out of the hands of private banks and consolidated all of them in the hands of the federal government. Since then, the Department of Education has been directly making 100 percent of all student loans.
That, of course, introduces an even greater degree of politics into the administration of the loans.
And early this morning, negotiators in the Senate appeared to have come to an agreement on how to deal with student loan interest rates going forward. As you can imagine, politics drove the terms of the agreement far more than a rational application of market forces. CNN reports:
Sen. Tom Harkin, Democratic chairman of the committee that oversees federal education programs, agreed to the deal, one of those sources close to the negotiations told CNN.
The Iowa senator's support is key because it would likely persuade most Democratic senators to vote for the bill.
Harkin has resisted for weeks agreeing to a plan unless it included caps on how high the interest rates on the loans could rise. The tentative plan includes caps on loans to undergraduate students at 8.25%, graduate students at 9.5% and parents at 10.5%.
Student loan rates doubled July 1 from 3.4% to 6.8% after Congress failed to reach a deal averting the increase.
Harkin also pressed to ensure the government would not profit from the loans. A final cost analysis, which would determine that, was not completed as of Wednesday night, a Democratic leadership aide said.
So once again, in a political pander, Congress attaches all kinds of conditions to the setting of interest rates that would never be applied by a bank, thus manipulating the market and encouraging more students to take on long-term debt. That is the last thing students or the country needs, as aggregate student loan debt is approaching $1 trillion, and default rates indicate we could be looking at a meltdown that would rival the mortgage market crisis of 2008.
It's not a good deal for students, either, especially for the 46 percent of public institution enrollees who take on debt and don't even finish their degrees:
The cumulative amount borrowed per academic credit earned was highest for noncompleters at for-profit institutions — $350 per credit, compared with $80-$190 per credit in the other three types of institutions.
The median cumulative federal student debt for all noncompleters was the equivalent of 35% of their annual income. The debt burden was highest for students in four-year private nonprofit institutions — 51% of borrowers’ annual income. Debt burden among noncompleters who started in for-profit institutions increased from 20% to 43% of annual income between 2001 and 2009.
In 2009, 31% of noncompleters who started at for-profit institutions carried debt of 100% or more of their annual incomes. This far exceeds the rates of those with similar debt burdens who first started at other types of institutions, 7% to 21%.
“Noncompleters in 2009 had lower rates of employment when they left post-secondary education than did completers at all four institution sectors analyzed in the study.” The lower rates of employment affect the ability of nocompleters to pay back loans that have grown increasingly burdensome.
Some of the reasons we have market-based interest rates are a) to protect lending institutions against the possible cost of lending to high-risk borrowers; and b) to discourage people who shouldn't be taking on a lot of debt from doing so.
Congress turns this on its head by trying to make it as easy as possible for students to borrow money, in part by tying interest rates to political considerations rather than market considerations.
When you've got thousand of dollars in student loan debt, and you're not making anywhere near the income you expected post-college (and sometimes even if you are), political tinkering of your interest rate is not the solution you need. But that solution should have come before you ever borrowed the money, from politicians who didn't encourage you to take on the debt in return for what is increasingly a bad deal for many students.
But Congress and the Obama Administration continue to double down on the politicization of the student loan market, with the federal government now directly taking on the role of banker doling out loans to high-risk borrowers. How much confidence would you have dealing with a bank that was lugging around the balance sheet of the federal government?
Exactly. And when you see how they set interest rates, it's no wonder.
