With $1.2 trillion in student loan, it’s no surprise that Americans – especially young people – are squeezed by high monthly loans. The Obama Administration thinks the answer is a bailout, which is predicted to cost the American people an unknown and ungodly amount of taxpayer dollars. And the administration says it doesn’t need Congress to get on board, it’s happening by hook or crook.
It is interesting that this latest likely bailout is coming on the heels of a study by the New York Federal Reserve Bank indicating that injecting more federal money into school loans makes the overall cost of tuition rise. Charlotte blogged on this earlier today.
The Department of Education is formally proposing rules this week to expand eligibility for a program called Pay As You Earn (PAYE). It caps the monthly payments for borrowers at 10 percent of their “discretionary” income, which is defined as the amount above 150 percent of the poverty line. That can be hundreds or even thousands of dollars per month.
Some six million more Americans would be eligible for taxpayer largess under proposed rules. The expansion of this program is meant to stem the rise in defaults on student loans and to be a backstop for loan borrowers who run into financial difficulty to prevent their accounts from becoming delinquent (meaning payment hadn’t been made in at least 30 days). Apparently, about 17 percent of the $1.2 trillion in outstanding student debt was delinquent as of March 31, according to data from the Federal Reserve Bank of New York. If you add borrowers who currently don’t have to make payments yet because they are still in school or have been granted grace periods, the delinquency rate may be three times higher.
This move is also meant to keep more money in the pockets of borrowers to spend in the economy.
The Department of Education is moving ahead without congressional approval. The public can comment but the rules will be finalized in late October. How much will this cost? So much that the Administration isn’t telling us, but it’s likely a huge price tag.
Will this program be effective? The other main two income-based repayment plans have tripled in enrollment over the past couple of years (although most borrowers bypass these plans), yet defaults remain high. While they provide a little relief in the short-run, the debt beast grows to unwieldy proportions over the long-run as some of the monthly payments don’t even cover interest payments.
The Wall Street Journal explains the risks:
The administration didn’t release cost estimates Tuesday for expanding income-based repayment, but it previously resisted expanding the program due to high costs.
“Expanding eligibility would constitute a significant cost to the government,” the Education Department said in the initial rules that created PAYE, in 2012.
The plans risk raising costs for several reasons. Public workers, mainly those working for government agencies and nonprofits, can make payments under PAYE for a decade; and then, under a separate legal provision, have any remaining balance forgiven at taxpayers’ expense.
Private-sector borrowers can have balances forgiven in 20 years.
Payments under PAYE are often too low to cover interest, allowing the overall student-debt tab to swell and making it even harder for borrowers to pay off the full balance. That is one reason enrollment remains low.
Critics, including researchers at the New America Foundation, a Washington think tank, warn the programs are enticing many borrowers who earn decent salaries who don’t need the help. That could ultimately cost the government money, since the government has counted on full payments from those borrowers in its long-term budget forecasts.
Millennials are the most educated generation, but we’re also saddled with a millstone of student loan debt incurred as we pursued college degrees and advanced degrees hoping to make ourselves more marketable in the marketplace.
We came out during and after the recent recession to find no jobs or no good jobs. This recovery has brought part-time, low-skilled work back, but not enough of the good jobs we hoped to get. As a result, Millennials are delaying and postponing moving out of our parents’ house, buying homes and all of the big ticket purchases to fill our houses, purchasing cars, getting married, and starting families. That’s having an impact on the market.
Proposals to lower our monthly repayment amount or Congress’s annual vote to keep interest rates artificially lower are band aid solutions to the problem. As we reported recently, the federal spigot that provides unfettered loan aid to student borrowers is driving higher education costs as schools know they have no incentive to control their costs when the government will be there to put cash in the pockets of borrowers. It’s a vicious cycle that needs to be broken on the front-end (when students are applying to schools and paying for school) rather than trying to clean up the mess of high debts after they graduate.
And let’s also acknowledge that a four-year college degree is not the only vehicle to career success. The “every-kid-to-college” mindset is a one-size-fits-all approach to educating our young people but ignores the unique aptitudes and stigmatizes non-college or non-four-year-college paths.
Republican presidential candidate and Florida Senator Marco Rubio wants to tackle the student loan problem –calling it a cartel to be broken by innovation and market competition:
Sen. Marco Rubio (R-Fla.) on Tuesday pledged to bust the higher education “cartel” in an economic speech laying out his vision for the country.
He vowed to enact immigration reform based on getting skilled workers into the country while protecting U.S. jobs and called for an overhaul to a higher education system controlled by “a cartel of existing colleges and universities.”
“Within my first 100 days, I will bust this cartel,” he said in his address at a tech incubator in downtown Chicago.
On education, Rubio said he would establish a new accreditation process that would “expose higher education to the market forces of choice and competition” and create income-based loan repayment programs to make student debt more manageable.
“Our higher education system is controlled by what amounts to a cartel of existing colleges and universities, which use their power over the accreditation process to block innovative, low-cost competitors from entering the market,” he said.
“Within my first 100 days, I will bust this cartel by establishing a new accreditation process that welcomes low-cost, innovative providers. This would expose higher education to the market forces of choice and competition, which would prompt a revolution driven by the needs of students — just as the needs of consumers drive the progress of every other industry in our economy,” he said.
He also called for student investment plans and an increase in vocational and apprenticeship programs to encourage high school students to begin careers as mechanics, plumbers or electricians.
What Americans realize is that we need to be proactive in restraining government dollars on the front end of higher education so that we don’t have to expend even more in dealing with debt on the back-end. Such policies can stem the rising education costs and better positions students for success.