Showing posts with label Senator Elizabeth Warren. Show all posts
Showing posts with label Senator Elizabeth Warren. Show all posts

Sunday, August 11, 2013

Obama Signs a Bill to Reduce Interest Rates on Student Loans: This is Just a Side Show

Earlier this month, Congress passed a bipartisan bill to reduce interest rates on student loans, and President Obama signed the bill into law this week.  Under the new law, the interest rate on this year's undergraduate loans is set at 3.9 percent. For graduate loans, the rate is 5.4 percent. For loans taken out by parents, the new rate is locked in for this year at 6.4 percent.

Interest rates will rise if the interest rate on 10-year treasury notes goes up, which it is expected to do, but the maximum interest rate under the new law is capped at 8.25 percent for undergraduate loans. The cap for graduate student loans is set at 9.5 percent and parents' loans are capped at 10.5 percent.

The new law is good news, I suppose, and nullifies the 6.8 percent interest rate that undergraduates were paying before it was enacted. But make no mistake--the recent Congressional squabble about interest rates on student loans is just a side show. 

Why? Because almost everyone participating in the congressional debate on student-loan interest rates assumed that the borrowers will pay back the money. As I noted in a previous blog, the New York Times and Senator Elizabeth Warren talked as if the government would make an unseemly profit if the interest rate on student loans wasn't lowered.
 
Out of Control
All this is nonsense.  The student loan default rate is so high that the government is going to lose money no matter what interest rate it charges on student loans.  How high is the default rate? No one knows for sure because the Department of Education hasn't released the data.  But DOE itself estimates that 46 percent of students who borrow money to attend for-profit institutions will default on their loans at some point during the repayment period.

And, as everyone knows, DOE has been underestimating student-loan default rates.  So if DOE says 46 percent of students who borrow to attend for-profit colleges are going to default, it is a safe bet that the real default rate for this group is well over 50 percent. 

Furthermore, a lot of former students have gotten economic hardship deferments that temporarily excuse them from making loan payments; and these people aren't counted as defaulters. Nevertheless, a lot of these folks will never pay off their loans. 

As Senator Harkin's Senate Committee report pointed out, people whose loans are in deferments are excused from making loan payments, but the interest on the loans continues to accrue for most borrowers, causing students' overall debt to grow larger with each passing month.  Thus, economic hardship deferments are making it harder for debtors who obtain them to ultimately pay off their loans.

How many people have loans in deferment status? DOE hasn't released the number, but it could be millions.  As the Harkin Report explained, for-profit colleges are aggressively encouraging their former students to apply for economic hardship deferments in order to keep their institutional default rates down.  And these deferments are ridiculously easy to get.  According to the Harkin Committee,  sometimes it is just a matter of a phone call.

No--the federal student loan program is like an out-of-control express train that is headed straight for a cliff.  Congress doesn't care--those guys and gals plan on getting off at the next station. No, it is students--especially students attending for-profit colleges--who are going over the cliff with the train.

References

Josh Lederman and Philip Elliott. Obama Signs Student Loan Deal. MSN Money, August 9, 2013. Accesible at: http://money.msn.com/business-news/article.aspx?feed=AP&date=20130809&id=16792937

Wednesday, July 24, 2013

Memo to Senator Elizabeth Warrren: The Student Loan Program Doesn't Have the Sniffles; It Has Cancer

Don't get me wrong. Senator Elizabeth Warren has been a faithful and sincere advocate for indebted college students.  Likewise, the New York Time has repeatedly editorialized against abuses in the student loan program, and its reporters have done a great job documenting some of those abuses.

Just a little case of the sniffles?
photo credit: politico.com
But for Senator Warren and the New York Times to state that the federal government is making a profit on the federal student loan program shows how ignorant they are about the true state of that program.
Senator Warren, advocating for lower student-loan interest rates, stated emphatically that the government is making a profit on the new interest rate that went in effect on July 1. “Instead of helping our students, the government is making a profit on student loans,” Warren told a group of young people.  That is wrong, Warren declared. “That’s more than wrong. It’s obscene.”
And the New York Times is also under the mistaken impression that the government is turning a profit on student loans.  In an editorial entitled "The Student Loan Debacle," the Times cited a report from the Congressional Budget Office that concluded the government will make $184 billion on loans issued over the next ten years if it continues charging the current student-loan interest rate.
Of course, the CBO report is a complete fantasy. You can go on the web and read many excellent critiques of the CBO's accounting practices with regard to that report.  But you don't have to do that to know that all the talk about the government making a profit on student loans--obscene or otherwise--is pure baloney.
Let's look at some simple facts. Less than two weeks ago, the Ombudsman for the Consumer Financial Protection Bureau--a federal agency--said that total outstanding student-loan indebtedness had grown 20 percent in just 18 months!  The Ombudsman estimates the total student loan debt at 1.01 trillion.
We know that the amount of money students borrow from the federal student loan program has gone up every year for a long time now, and that the average amount students borrow has gone up as well.
Finally, and most importantly, we know the student-loan default rate is going up.  The government puts the default rate at 13 percent based on the number of borrowers who default during the first three years of the repayment period. But everyone knows the real default rate is much higher.  (I have written about this many times.)

Do you see any profit for the government in any of this? Of course not.If Senator Warren and the New York Times really believe the federal government is making a profit from the program, then they've failed to grasp the fact that the government is losing billions of dollars due to student-loan defaults.
The current Congressional debate about the proper interest rate for student loans is a side show. Obviously, it would be a good thing for students if interest rates are kept low. But keeping interest rates low for future students does nothing for the millions of people who have already defaulted on their student loans.
Frankly, it disturbs me to hear Senator Warren demonstrate such a shocking lack of understanding about the federal student loan crisis.  Or perhaps she understands the crisis but is afraid to speak out more forthrightly because a big part of her constituency base is in Boston, with its large number of colleges and universities. Many of those colleges could not survive without the federal student loan program.

But Senator Warren came to the U.S. Senate with a reputation for being a courageous and vigorous advocate for the poor and middle class families. If she wants to keep that reputation, she needs to push legislation far more radical than simply keeping interest rates low for student loans. 

What should she do?
  • Senator Warren should support passage of  a law that will allow insolvent student-loan debtors to discharge their student loans in bankruptcy.
  • She needs to push for repeal of the 2005 law that makes it almost impossible for people to discharge student loans from private lenders like Wells Fargo and Bank of America.
  • Senator Warren should propose legislation to protect elderly insolvent student-loan debtors from having their Social Security checks garnished.
  • Finally, she needs to introduce legislation that will give student-loan debtors the right to sue colleges that have engaged in misrepresentation and fraud regarding their student aid practices.
Advocating for lower student-loan interest rates is simply tinkering around the edge of the student loan crisis.  We must remember that the student loan program is not a healthy entity with a little case of the sniffles. It is a cancer that is destroying the lives of millions of Americans.
 
 References
Editorial. The Student Loan Debacle. New York Times, July 24, 2013, pa. A22.

Ruth Tam. Warren: Profits from student loans are 'obscene." Washington Post, July 17, 2013. Accessible at: http://www.washingtonpost.com/blogs/post-politics/wp/2013/07/17/warren-profits-from-student-loans-are-obscene/

Wayne Winegarden. Uncle Sam's Phantom Loan Revenues. Wall Street Journal, June 21, 2013. Accessible at: http://online.wsj.com/article/SB10001424127887323394504578608071549952576.html