A Brief Look at Obama’s Student Loan Overhaul

August 9, 2010

I’m watching The Willis Report. She opened tonight’s show by talking about student loans (Part 1 and Part 2). She displayed a graphic with a few of Obama’s ideas for overhauling student loans:

• Cap loan payments at 10% of adjusted income.

• Forgive remaining balances after 20 years of repayment.

• Provide $2.6 billion for minority serving institutions.

• Appropriate $500 million annually for community colleges

• Provide $750 million for state education grants.

I don’t like the first three suggestions at all. Cap loan payments? Seriously? Forgive balances? Special treatment for minority schools? When I went to a state school in the mid-90s, there were lots of minorities on campus. I can’t imagine why colleges that specifically serve minorities should receive special aid in this day and age. I don’t think we should use taxpayer funds to keep them in existence.

Sadly, except for the community college support, NONE of the above suggestions address the real problem:

College is too expensive in the first place!

We don’t need help affording college, we need college to be cheaper.

How do we do that? Transparency! I see nothing wrong with colleges publishing their financials for all to see. Colleges should be held accountable for their budgets. It shouldn’t just be accepted that college costs will rise annually.

Thoughts?

18 responses to A Brief Look at Obama’s Student Loan Overhaul

  1. I agree. I think that if this were to go through, you’d have people figuring out how to game the system within days. There’d be deferrals and ways to hide income and all that which would allow people to sneak past paying their loans back, and that money isn’t going to come out of thin air. Someone, somewhere would have to pay it.

    I agree that college costs have been getting way too expensive. I was saying that back when I went to college in the mid-90’s and it hasn’t slowed down at all.

  2. College costs have risen in proportion to the amount of loan money available to the student, not in relation to the actual cost of educating a student. Colleges see the opportunity to grab all those government dollars and they take it. (To hell with the student who must pay it back.)

    If the government would stop making $20k+ loans to students on an annual basis, tuition would drop accordingly at colleges that serve the average person. Elite colleges would stay high priced because wealthy parents can still afford it.

    Back when dinosaurs roamed the Earth and I was in college (mid-’80s), I could only borrow $5k a year for the two years my brother and I were in college at the same time. Beyond that, I had to finance the $15k cost with grants, jobs and the Bank of Mom and Dad.

    Cut the government subsidies and the tuition will follow.

  3. Agreed on the above points &:

    1- When I was in college (many years ago) there was a huge cost difference in attending a local “competetive” college vs. a top tier school. Now the cost difference is minor. The only way to try to minimize the costs is to choose a community college & transfer or your own state university. Depending on the state, even they are getting pretty expensive.
    2- I have long argued that a population can not absorb 7% to 8% increases in property taxes and/ or college education costs for year after year.
    3- There is a parasitic relationship with the govt., the financing institutions & the colleges. They have all conspired to profit at the expense of the public.

    IMHO – Manny

  4. One way to make college more affordable is to cap its cost at 10% of a graduate’s income over 20 years – which is exactly what these proposals would do.

  5. Why 10%, BD? Why not 8%, 7%, or 6%? What makes you or the government think that capping costs at some arbitrary limit will help college affordability? And what makes you think it won’t be gamed and abused like other government programs are (ie Pell grants)?

    As Leigh stated so eloquently above, cut the government subsidies and the tuition will follow. The government has no business in educational subsidies which only serve to artificially prop up tuition rates while inevitably favoring certain groups over others.

    The fact of the matter is that higher education is clearly in a bubble, one that will be popping in the next 5-10 years. You can already see the signs now.

  6. #4 BD) No it wouldn’t. Since Uncle Sam would be eating the loss on those loans, the colleges are still getting their money and would have 0 incentive to lower the costs.

    How to make something cheaper: increase the supply, or decrease the demand. Build more colleges and/or reduce the number of people wanting to attend. As Leigh said: reducing the amount of money people can borrow, would effective reduce the number of people that could attend college (and would decrease the costs).

  7. The fact that congress had to slip this into another bill totally unrelated to student loans shows what a load of crap this “reform” is. FOrgive someone’s loans after 20 years? Why won’t they do this for mortgages too? I would love to have my mortgage forgiven after 20 years! Oh, wait, they may just do that too – but I would never qualify.

    I am hoping that the college tuition bubble pops well before my 3 1/2 year old twins need to go to college!!!

  8. I completely agree with JT. I believe that higher education is a bubble that will pop (I wrote about it back in 2008 but I haven’t been proven correct yet).

    The moment the gov’t leaves the sector OR private lenders realize that 23 year olds can’t pay back 12% – 19% interest rates tuition will crash.

    The minority thing is just plain bull shit. Not only does the government throw that affirmative action crap on entrance, my tax dollars are now going to further subsidize the education?

  9. Just be patient. There are cheaper ways to educate by the day. The digital revolution that we are going through will force education to get cheaper. When the government subsidies stop to publice institutions, the system will crumble.

    See below link where MIT is giving away 2000 courses for FREE.

    http://ocw.mit.edu/index.htm

    Check out the revolution I mentioned…
    http://KhanAcademy.org

    My best advice to parents. Do not pay excessive money for your kid to get a BA degree in anything. Probably good to get a BS in engineering, math or science. Support them getting a masters. Do not take on their debt.

    Students: avoid student loan debt like the plague. If you are going to get a BA degree, maximize AP/clep tests, take community college courses and get out under $25K in costs.

    For more details…check out
    http://www.garynorth.com/products/item7.cfm

  10. Spot on my friend, spot on. I completely agree. The whole system is messed up. In order to have a better life and to have a better job you have to more times then not go to college or some sort of trade school. In order to make money you have to spend money. Has education really changed that much over the last 50 years? Math is still the same, English is still the same, Science is still the same(basic principles at least). It’s not like things have changed a whole lot.

  11. I took the easy way out of paying for college and did a tour in the military.
    Post NAFTA it is getting more difficult every day to become a member of the middle class. People have recognized that higher education is the best bet, as more of our blue collar jobs leave the country. That is the source of the high level of demand for College. The bad news is, as more and more job seekers have advanced degrees, they will be unable to demand high wages and the middle class will continue to shrink. The good news is that once we can’t demand high wages, the rationale for going to college won’t hold water and the prices will come down.

  12. How many of you are in college at this point in time?

    @Lynn: When a person takes out a student loan THERE IS NO COLLATERAL! Do you know why they don’t forgive mortgages? The bank can just take the house back. With mortgage debt, you can also file bankruptcy and discharge the debt. This is not so with student loans. Once you take one on, the only way out is to repay them (or with federal loans go with one of the loan forgiveness options–PeaceCorps, Teach for America etc).

    While I will say that college is WAY too expensive, considering that most graduates won’t really recoup the massive investment, some of you are being incredibly harsh on these reforms!

    @Beeg: I think you have to be clearer. Not every BS is equal. Yes, engineering is a lucrative field. But how many high earning Biology majors have you met that didn’t have to go on to get an advanced degree?

    And as for the BA degrees, you can’t really judge them equally as well. No matter how much you argue, a BA from Ole Miss is not really equal to a BA from Princeton. Period. The amount of recruiting/alumni networking that goes on at a school like Princeton really outpaces that of schools in the lower tiers. So while going the “cheap state school route” is financially sound, I really believe that going big – if a family can afford it – is the way to go.

    — At my school, even people with measly liberal arts bachelors degrees get hired at high paying investment banks or consulting agencies. So is “excessive money” for a BA worth it at a good school?

    Probably.

  13. Lindsay,

    Maybe we are being harsh. Who knows. Most of us are of the opinion that these students knew in advance how expensive their education was going to be. They also knew how much they were going to have to pay back. Sure, some of them threw caution to the wind. But, is that really an excuse or a reason for taxpayers to magically forgive their debt?

    Going to college is a gamble. If you go to college and get a degree that’s essentially useless in the real world, then I don’t think taxpayers should let you off the hook.

    It’s insulting. Unfortunately, it (the constant bailing out of people for their financial failures) is also rampant in our culture.

  14. JLP, thank you for your response.

    So then, are you against the pre-existing federal loan forgiveness programs?

    What degrees would you say are essentially useless in the real world? Religious Studies? English? Sociology? These subjects have just as much intellectual value, and value to the real world as “practical subjects” like chemical engineering do.

    And what about other low paying but necessary jobs? (Teaching, Social Work, and Nursing come to mind). Yes the government **partially** forgives the federal loans of those who go into these types of service professions, but the graduate could still be left with a substantial debt burden.

    So would you applaud the would be teacher for taking out a $20,000 loan to get a better education to become a better teacher to better serve students in need, or would you balk at her financial failure?

  15. Lindsay,

    I’m against ALL loan forgiveness because it does nothing to lower the price of college. If anything, it will drive prices up since loan forgiveness equates to free money. If college get a whiff of loan forgiveness programs you don’t think they won’t raise their prices?

    I don’t mean that those degrees are useless. What I do think is that people should do a cost-benefits analysis when deciding how much to spend on their degree. It makes no sense to fork out $200,000 for a degree that will land a job making $30,000 per year.

    I also fail to see how going beyond the required degree will make one a better teacher.

  16. Completely agree with FMF. And I think cost rise nost necessarily because of government loans, but because of ready availability of private loans. It’s also private loans that are more difficult to repay. But the cost has to be addressed – when most of us don’t get raises every year, when the inflation is supposedly at 1%, why should colleges raise costs every year.

    “Cap loan payments? Seriously? Forgive balances?”

    Exactly. This way someone can get 200K to go to an expensive private college and major in women studies (or god knows what – any of those majors that lead nowhere), then get a 20K a year job. Do your math.

    If I were a lender and faced with these conditions, I’d ask for future major (and verify high school grades, AP classes to make sure someone has a reasonable chance to get a particular degree), calculate range of probable wages, probability of default, etc. and would only lend the amount that would make it reasonable for a loan to be repaid in 10 years (with adjustment for possible defaults). I’d also verify every year that the person is indeed majoring in what he or she claimed.

    I’d imagine this would result in additional jobs for mathematicians, but I’d imagine the number of loans will drop dramatically. Which may eventually result in lower costs (which might not be bad), but not right away.

  17. I think the availability of PLUS loans and private student loans do far more to drive up the cost of college than loan forgiveness.

    The benefits of going to college and getting a degree go beyond the salary you get when you graduate. Though one does have to wonder if high priced schools just sell you that to get you to pay the price. Though, I took college classes in high school and I can tell you that there is a HUGE resource gap between my free state school and my not so free pretentious east coast school.

    And you don’t see how shelling out (a reasonable amount) for a school with an excellent teaching program (if that’s what you wanted to do) could make you a better teacher or give you the skills to become a better teacher versus going to a free state school with an average (or less than) teaching program?

    Plus, shouldn’t we as a society be subsidizing excellent educations for our teachers? Alas, that’s a different argument entirely.

    @kitty: you are misinformed! The only loans eligible to be forgiven are federal loans. The amount a student is able to take out over his/her lifetime are capped. Considering the salary you quote, you are most likely talking about and undergrad degree. The government WON’T LET a student borrow $200K!! The max federal debt an independent undergrad with financial need could accrue (which would mean stafford + perkins) would max at about the $80,000 range (which is still a lot).

    Also, though major is a good indicator of future salary, it isn’t the definitive answer. You don’t know what else he or she is brining to the table. Maybe that women’s studies major hopes to bring his/her expertise to a global consulting firm.

    It’s the ATTITUDE that leads to nowhere, not the major.

  18. How about we just require all colleges to peg tuition against recent graduates’ (last four years, let’s say) average starting salaries at their new jobs (which can be zero if they remain unemployed)? The colleges have a stronger incentive to place graduates in jobs (and in the best jobs they can find for them), and the price of the degree is directly related to the graduates’ immediate incomes. I think MIT and maybe a couple of other schools already do this.