The Obama Struggle With Student Loans

President Obama has been campaigning around the country this week (or as he puts it, going on official, taxpayer-funded business trips) to talk about his plan to have taxpayers continue to subsidize student loans. When he does this, he claims that he and Michelle know what it’s like to struggle with student loans and that they only paid off their loans eight years ago.

  1. Mel Foil

    Obama does this crap because it works. One more reason that America is doomed.

    Have a great Thursday!

  2. Britanicus

    I have about 30k in student loans to repay from my college years. My family wasn’t able to pay upfront for my education (a good state school) so loans were the only option.

    I worked all throughout school, but wasn’t nearly as frugal and wise with my money as I ought to have been. Do I want Obama or Romney to use tax payer funded money to pay off my loans? No.

    There used to be a term for someone who couldn’t pay off their debts/expected others to pay for them: Deadbeat.

  3. Trace

    A couple of clarifying points:

    “Subsidized” student loans, which excuse interest while the borrower is in college are means-based. Unsubsidized Stafford loans, which are available to all regardless of means, do not excuse these interest costs but rather capitalize and defer those costs. So the only “subsidy” comes for those loans come in the low rate which is a reflection of the low rate the government receives in Treasury market.  Even the “temporary” low rate include an arbitrage between the two rates which nets the government income.

    Even though many loans default, the actual default rate, because of the government’s excellent collection powers is in the low single digits. There are unreimbursed collection costs of course, but this is likely a very small number in the grand scheme of things.

    The loans are just that — a loan — and the prudence of choosing a cheap college or an expensive college does not bear on the taxpayer at all. That is a personal choice and does not excuse whether or not you make a wise or foolish choice over where to go to school.

  4. Trace

    Eliminating the student loan program would prevent millions of students that are “sub-prime” from attending school at all. Should they and their families have saved to go to school instead? Perhaps. But as a practical matter, denying these students the opportunity to borrow to go to school forces them into community college (which is an even larger subsidy from the taxpayer) or worse still leave them more exposed to end up on public assistance or worse.

    So given the benefit to the nation of encouraging tertiary education, the student loan program, which requires personal responsibility versus the straight government subsidy represented by public education, is not such a bad deal.

  5. Matt Bartle
    My guess is that they paid the loans off as slowly as they could. It wasn’t an issue of ability to pay, just that they paid the minimum required and that’s why it took a while. If the interest is minimal, it makes sense to pay the loan off slowly.  
  6. Ecdysis

    The reason people are sub-prime is because their merits, test scores, grades, and chosen major, make college a bad investment for them and the lender. Not going to college for them would be a good idea.

    The notion that you have to have a college degree to be successful is baloney. There are many other skill sets, to which they may be much more suited, that do not take a college degree.  Federal subsided loans make it TOO easy for people to borrow, inflate tuition prices, and (in the case of loan forgiveness) is fundamentally unfair to other fiscally responsible tax payers. 

    Disclosure: My school debt is approx. $120,000

  7. Trace
    Ecdysis: The reason people are sub-prime is because their merits, test scores, grades, and chosen major, make college a bad investment for them and the lender. Not going to college for them would be a good idea.

    The notion that you have to have a college degree to be successful is baloney. There are many other skill sets, to which they may be much more suited, that do not take a college degree.  Federal subsided loans make it TOO easy for people to borrow, inflate tuition prices, and (in the case of loan forgiveness) is fundamentally unfair to other fiscally responsible tax payers. 

    Disclosure: My school debt is approx. $120,000 · 5 minutes ago

    I didn’t say degree. The Title IV program applies to all manner of certificate and diploma skills training and the data there is incontrovertible. And your point about sub-prime not being a good investment is just wrong. A young, single mother on welfare can change her life by borrowing $13K to train to be a medical assistant. As a matter of public policy, that is an investment that a commercial lender will not make but one that the government is wise to make.

  8. Ecdysis

    I am unconvinced that a commercial lender will not make that investment if that mother has the grades, test scores, and the training would be for a lucrative occupation. And if the government was not involved in the lending business, the loan would not be for $13K; tuition would be substantially less.

    If the commercial lender, who makes a decision based on each particular case, decides that the risk of losing money is not outweighed by the benefits, why is that suddenly a good investment for the federal government? Yes, she could definitely make her life better, she could also make it a LOT worse by having addition debt that she can’t pay off.  Now she is on welfare and has an unpaid loan if she defaults. Commercial lenders are in a better position to weigh these risks.

    Finally, it is not the federal government’s money. It is the tax payer’s money. Why should they take these investment risks? Subprime lending by definition is a bad investment for the lender without higher interest  rates.

    There is no issue here that can’t be handled better by the free market and charitable private grants.  

  9. Trace
    Ecdysis: I am unconvinced that a commercial lender will not make that investment if that mother has the grades, test scores, and the training would be for a lucrative occupation. And if the government was not involved in the lending business, the loan would not be for $13K; tuition would be substantially less.

    Sorry Ecdysis but I work in this area and you are just wrong. Medical assistants earn $14/hour. There is no one for whom that job is up that has $13K saved and no lender that will lend to someone for whom that job is up. There are no “test scores” involved.

    It’s a good investment for the federal government because it’s a loan (though she probably also qualifies for grants) and the alternative is public assistance and in extreme cases, prison.

    This is an admittedly easy and extreme example but it’s apt. Your point holds of course at some level there are Associates students in business that should instead be training to fix ATM machines. But the point is that it’s a loan and the government always collects, so first principles notwithstanding, there are many worse programs to complain about.

  10. theotherbriansmith

    While I don’t personally agree with the culture of Big Education and borrowing money(I used the GI Bill and took a semester off to work when I ran out of tuition money instead of taking student loans which were almost forced on me,) I can see the value in supporting education loans for low income individuals.  The problem I see: it is too easy to borrow big money at an age of immaturity and in a culture of entitlement that tells the student that a well paying job is a right.  If you want to borrow it, figure out how to pay it back. 

    From barackobama dot com:

    [Obama] signed a new law that makes it easier for students to pay back their federal college loans. Starting in 2014, new borrowers will pay no more than 10 percent of their disposable income, and the President recently proposed accelerating this benefit for current students. The law also allows any remaining debt to be forgiven after 20 years. Those engaged in public-service professions—such as teachers, nurses, or members of the armed forces—will have any remaining debt forgiven after 10 years if they make their payments on time.

  11. DocJay

    Mollie, quit living in the last millennium.  200K of free education is a right that shall not ever henceforth be denied.

  12. Trace
    theotherbriansmith: The problem I see: it is too easy to borrow big money at an age of immaturity and in a culture of entitlement that tells the student that a well paying job is a right.  If you want to borrow it, figure out how to pay it back. 

    Yes the President’s policies all favor increasing the amount of subsidies in higher education at taxpayer expense. And to the best of his ability, he is attempting to circumvent Congress to make this happen.

    And yes, too many people borrow too much for degrees that do not help them and to a great extent the generosity of the existing programs allow this to happen.

    But reverting to an all-private system at this point would actually be damaging in the near term for the reasons I describe above – because there are many, many people that can benefit from post-secondary education (whether a BA or training to be a hair stylist) that would be unable to pursue that education.  

    Maybe there is a way to sensibly unwind the government’s participation in highered financing, but for my part I would rather see money spent subsidizing education than welfare or prisons.

  13. theotherbriansmith
    Trace Urdan: Maybe there is a way to sensibly unwind the government’s participation in highered financing, but for my part I would rather see money spent subsidizing education than welfare or prisons.

    Fair point.  I guess that is the dilemma of conservatism.  Unwinding the governments’ participation and keeping practical measures in place seems all but impossible.

  14. Lucy Pevensie
    Trace Urdan

    Ecdysis: . . . And if the government was not involved in the lending business, the loan would not be for $13K; tuition would be substantially less.

    Sorry Ecdysis but I work in this area and you are just wrong. Medical assistants earn $14/hour. There is no one for whom that job is up that has $13K saved and no lender that will lend to someone for whom that job is up.

    Trace, you’re missing Ecdysis’s point, which is that government guarantees of loans give people the ability to borrow more money than really makes sense for the educational programs they are taking on. How does it make sense for someone to borrow $13K to pay for training that will let you earn $14/hr before taxes? 

    Sorry, but the students are deluded into thinking they benefit, when the real beneficiaries are the academic institutions and their administrators, who are free to raise tuition sky high and pay themselves fat salaries.  Effectively, student loans are a transfer from the (frequently impoverished) student to the (relatively wealthy) educational institution mediated by a dishonest government. It’s flat out wrong.

  15. Lucy Pevensie
    Trace Urdan

    theotherbriansmith: The problem I see: it is too easy to borrow big money at an age of immaturity and in a culture of entitlement that tells the student that a well paying job is a right.  If you want to borrow it, figure out how to pay it back. 

    Maybe there is a way to sensibly unwind the government’s participation in highered financing, but for my part I would rather see money spent subsidizing education than welfare or prisons.

    But Trace, with loans it’s not (as you point out) the government’s money that’s being spent. It’s the money of the student, who doesn’t have good alternatives to spending a huge amount of his/her future earnings on tuition and who doesn’t really understand what signing on the dotted line for that loan means.

  16. Lucy Pevensie
    R. Craigen: My parents were dirt poor.  There was no way they could pay a dime toward university for me, and I didn’t expect them to. . . .

    I realise with tuition nowadays it’s not so easy, esp. if your heart is set on an Ivy-League school.  Even so, what’s wrong with kids  today?

    Actually, at least the way the system works in the US, having dirt-poor parents is an advantage.  Since most of the scholarship money these days is need-based, a person from a truly poor family will have a better chance of graduating with little or no debt than a person from a middle-class family. 

    If average annual tuition (excluding room and board) for a private four-year college is more than $31K, it just isn’t possible for an ordinary middle class family to pay full tuition, particularly if the family has more than one child, and yet the middle class family may be considered too prosperous for scholarships.  The system will spit out an “expected parental contribution” that may be entirely unrealistic.  And academic scholarships are very rare these days.

  17. Trace
    Lucy Pevensie

    Trace Urdan

    Ecdysis: . . . And if the government was not involved in the lending business, the loan would not be for $13K; tuition would be substantially less.

    Trace, you’re missing Ecdysis’s point, which is that government guarantees of loans give people the ability to borrow more money than really makes sense for the educational programs they are taking on. How does it make sense for someone to borrow $13K to pay for training that will let you earn $14/hr before taxes? 

    Sorry, but the students are deluded into thinking they benefit, when the real beneficiaries are the academic institutions and their administrators, who are free to raise tuition sky high and pay themselves fat salaries.  Effectively, student loans are a transfer from the (frequently impoverished) student to the (relatively wealthy) educational institution mediated by a dishonest government. It’s flat out wrong. · 16 hours ago

    Edited 16 hours ago

    Lucy — The government doesn’t guarantee the money (those were the old days;) it lends the money directly. And you’re right that many students make poor choices which they regret when they have to repay the loans, but that is hardly the fault of the government.

  18. Trace
    Lucy Pevensie

    Trace Urdan

    theotherbriansmith: The problem I see: it is too easy to borrow big money at an age of immaturity and in a culture of entitlement that tells the student that a well paying job is a right.  If you want to borrow it, figure out how to pay it back. 

    Maybe there is a way to sensibly unwind the government’s participation in highered financing, but for my part I would rather see money spent subsidizing education than welfare or prisons.

    But Trace, with loans it’s not (as you point out) the government’s money that’s being spent. It’s the money of the student, who doesn’t have good alternatives to spending a huge amount of his/her future earnings on tuition and who doesn’t really understand what signing on the dotted line for that loan means. · 1 hour ago

    Well the new highly-loathed Consumer Financial Protection Bureau is working on ensuring that the level of consumer disclosure is raised considerably. Students benefit directly from the education so it makes sense for them to pay for it. Again — the fact that student make poor choices is not the fault of the lender.

  19. Lucy Pevensie
    Trace Urdan

    Lucy Pevensie

    Trace Urdan

    Ecdysis: . . . And if the government was not involved in the lending business, the loan would not be for $13K; tuition would be substantially less.

    Trace, you’re missing Ecdysis’s point, which is that government guarantees of loans give people the ability to borrow more money than really makes sense for the educational programs they are taking on. How does it make sense for someone to borrow $13K to pay for training that will let you earn $14/hr before taxes? 

     

    Lucy — The government doesn’t guarantee the money (those were the old days;) it lends the money directly. And you’re right that many students make poor choices which they regret when they have to repay the loans, but that is hardly the fault of the government.

    Except that the government makes it possible for these places to charge extravagant tuition, and distorts the market (as ecdysis points out).  The student is left without a lot of good choices.  If there were no market distortions in the first place, and employers needed (for example) medical assistants, the market would figure out a way to supply such people without enriching the academic intermediaries.

  20. Trace
    Lucy Pevensie

    How does it make sense for someone to borrow $13K to pay for training that will let you earn $14/hr before taxes? 

    It makes perfect sense when the alternative is minimum wage, welfare, or worse. $13K (which overstates the amount borrowed because most students in those programs qualify for full or partial Pell,) translates to $150/month over a 10 year repayment at the regular 6.8% interest rate. At the current reduced 3.4% rate it translates into $130/month. Assuming some state tax, that level of income translates into $2000/month in take-home pay. That loan burden is not insignificant but the opportunity to work as a medical assistant or in medical billing and coding in a professional setting with benefits is life-changing.

    So yes there are many things that could be made better in our higher education system, but the government loaning money to students is not the source of the problem and eliminating the loan program would cut off opportunity for vast numbers that are most in need of a path to better themselves.

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