In 2005, John Hechinger, a Staff Reporter at THE WALL STREET JOURNAL wrote a couple of interesting pieces on student loans that forewarned us of the future.
The January 6, 2005 article included a quote from a then-unknown bankruptcy expert — “Student-loan debt collectors have power that would make a mobster envious,” says Elizabeth Warren.
The 2005 article includes these little tidbits :
The rate on new student loans, set annually and tied to Treasury bills, is now 3.37%.
Two-thirds of students at private four-year colleges have student loans, averaging $17,000 at graduation, says the American Council on Education, which represents college and university presidents.
For current loans that go into default, the department now projects it will ultimately retrieve every dollar of principal, plus almost 20% in fees and overdue interest,
The October 19, 2005 article is entitled “College Tuition Costs Increase At Twice the Rate of Inflation” — highlights below:
The sticker shock of sending children to college isn’t just getting bigger. It’s also lasting longer — with the pain of college bills lingering as more students pile on debt.
Such debts are getting more expensive because their payments are tied to prevailing commercial interest rates. In July, for example, the rate for Stafford federal student loans, the largest program, jumped to 5.3% from 3.37%.
That was 2005 and now when asked during a TeleTown Hall meeting, John Kline patted himself on the back for his student loan legislation that only increased last year’s 3.4% interest rate to 3.86 percent for the coming year (the future rates are unknown and to see how quickly they can rise just refer to 2005 when it went from 3.37% to 5.3%).
— John Kline (@repjohnkline) August 15, 2013
Quick to review the situation and discuss it in language that every student can understand is Matt Taibbi in a scathing Rolling Stone article entitled Ripping Off Young America: The College-Loan Scandal.
Highlights of the Taibbi article :
The massive earnings the government gets on student-loan programs amount to a crude backdoor tax increase disguised by cynical legislators (who hesitate to ask constituents with more powerful lobbies to help cut the deficit) as an investment in America’s youth.
While it’s not commonly discussed on the Hill, the government actually stands to make an enormous profit on the president’s new federal student-loan system, an estimated $184 billion over 10 years, a boondoggle paid for by hyperinflated tuition costs and fueled by a government-sponsored predatory-lending program
After the latest compromise, the 10-year revenue projection for the DOE’s lending programs is $184,715,000,000, or $715 million higher than the old projection – underscoring the fact that the latest deal, while perhaps rescuing students this coming year from high rates, still expects to ding them hard down the road.
Fly-by-night, for-profit schools can be some of the most aggressive in lobbying for the raising of federal-loan limits. The reason is simple – some of them subsist almost entirely on federal loans. There’s actually a law prohibiting these schools from having more than 90 percent of their tuition income come from federally backed loans. It would seem to amaze that any school would come even close to depending that much on taxpayers, but loans to servicemen are technically issued through the Department of Defense, so they don’t count toward the 90 percent figure.
But the dirty secret of American higher education is that student-loan interest rates are almost irrelevant. It’s not the cost of the loan that’s the problem, it’s the principal – the appallingly high tuition costs that have been soaring at two to three times the rate of inflation, an irrational upward trajectory eerily reminiscent of skyrocketing housing prices in the years before 2008.
The federal student-loan system is essentially a massive and ongoing government subsidy, now increasingly paid for in the form of federally backed loans to a political constituency – low- and middle-income students – that has virtually no lobby in Washington.
Taibbi’s article faults both political parties, concluding :
We’re doing the worst thing people can do: lying to our young. Nobody, not even this president, who was swept to victory in large part by the raw enthusiasm of college kids, has the stones to tell the truth: that a lot of them will end up being pawns in a predatory con game.
For those who followed the “game”, know that President Obama started with a broad reform proposal with changes in payback terms and tying the interest rate to US Treasury bonds plus 0.91% … Chairman Kline countered with no changes in payback terms and applying a 2.5% adder to Treasury rates (note: President Obama’s proposal would have actually lowered rates from the 3.4% to 2.72% while Chairman Kline’s would have raised rates by more than 20%.) A group of Senators proposed using a the 10-year Treasury note (1.81 percent for the 2013-14 school year), plus 1.8 percent for undergraduates which have raised rates from the previous year … but House Republicans would not accept that “low” rate … forcing a 2.05% adder. President Obama had a choice — veto or accept Chairman Kline’s proposal leaving students and families to wonder if our government could ever do anything. President Obama signed the bill saying :
even though we’ve been able to stabilize the interest rates on student loans, our job is not done, because the cost of college remains extraordinarily high. It’s out of reach for a lot of folks, and for those who do end up attending college, the amount of debt that young people are coming out of school with is a huge burden on them; it’s a burden on their families. It makes it more difficult for them to buy a home. It makes it more difficult for them if they want to start a business. It has a depressive effect on the economy overall. And we’ve got to do something about it.
Chairman Kline, enough of the self-congratulations, when the average student now leaves school owing $27,000 and paying higher interest rates, YOUR JOB IS NOT DONE.
Let’s start with holding committee hearings on Tom Petri (R-WI-06) legislation Earnings Contingent Education Loans (ExCEL) Act of 2013. Under the ExCEL Act, borrowers would pay an affordable percentage of their income until the loan is repaid.