Will Linking Student Loans to Markets Help Anyone?
Current students and graduates hold $1.1 trillion in outstanding debt — an amount greater than the nation’s combined credit card debt. Seventy percent of students who graduated this year owe an average of $35,200.
The amount of debt has grown to such weighty proportions because college education costs have skyrocketed; the annual cost of a four-year degree has increased three times as fast as the rate of inflation since the 1970s. What has made the crisis worse is the economy. While the labor market has made some gains since the recession came to an end, the progress has not necessarily reached new college graduates, who have a much higher unemployment rate than the broader U.S. population. The higher education system is broken, and consequently, various fixes are being vetted.
On Thursday, the House of Representatives passed a bill championed by Republican Rep. John Kline of Minnesota, the chairman of the House Committee on Education and the Workforce, that would link loan rates to financial markets. His plan combines subsidized and unsubsidized Stafford loans into a single loan and sets the rate at the 10-year Treasury Note plus 2.5 percentage points. The rate on plus loans would be equal to the 10-year Treasury Note plus 4.5 percentage points. He would set caps at 8.5 percent for the Stafford loan and 10.5 percent for the PLUS.
The bill passed on 22 yes votes and 198 no votes, mostly along partisan lines. President Barack Obama has said that he would veto the bill, as it would not guarantee low rates and would burden low- and middle-income students.
With the student loans taking over the national debate, Yahoo News held a panel discussion Thursday entitled “Generation I.O.U” to debate whether the way American students pay for college is broken.
The panelists made one important point. The inherent nature of student loans make them a difficult proposition. Unlike with a home loan, income is not taken into account when the money is borrowed for the simple reason that it cannot. Furthermore, there is no collateral; the government cannot repossess the person as the bank can with a home or with a car. That is why student loans do not go away during bankruptcy proceedings, and there is no statute of limitations. However, while those characteristics make the loaning of money to students a difficult proposition, it does not mean there is not a problem with how students pay for higher education.
As the economist Robert Archibald noted, college costs have soared because government subsidies are declining. At the same time, the Department of Education is expected to earn $50.6 billion in profit in 2013 from student loan programs, according to the Congressional Budget Office, an increase of 43 percent from last year. This projection puts its profits above those of last year’s most profitable company, Exxon Mobil. New lending laws and historically low interest rates have enabled the federal government to recoup much more than its costs.
So the problem is not so much the inherent difficulties of lending to students, but the fact that higher education is becoming big business at a time when the labor market is not welcoming to new graduates.
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