Showing posts with label Wayne Winegarden. Show all posts
Showing posts with label Wayne Winegarden. Show all posts

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