Oversold?
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In Kansas Governor Kathleen Sebelius's Democratic response to President Bush’s final State of the Union Speech Monday night, she touted a new law to “reduce the costs of college loans” as one of the major accomplishments of the new Democratic Majority in Congress. She was referring to enactment of the College Cost Reduction and Access Act of 2007, which among other things reduces interest rates on federally subsidized student loans. It was a big pat on the back for Congressional Democrats, who made cutting student loan interest rates in half a central part of their 2006 campaign. But Democrats should be careful not to oversell their achievement, as very few borrowers will get the full interest rate cut promised.
To be fair, under the new law, borrowers will also benefit from increased loan forgiveness for work in public service, substantially increased Pell Grant aid, and a decreased financial aid penalty associated with student work and savings. Indeed, the new law represents a significant increase in federal student aid. Higher Ed Watch has lauded it in the past.
The Fine Print
But when it comes to the much ballyhooed student loan interest rate reduction, take a look at the fine print. The College Cost Reduction and Access Act of 2007, signed into law on Sept. 27, 2007, does cut student loan interest rates in half. But it slowly phases in those cuts on new student loans only, achieving the promised 50 percent cut by the 2011-12 school year. After that date, interest rates on new loans revert back to the current fixed 6.8 percent interest rate. The cliff-like, expiration of budget policies is usually done to comply with (or avoid) budget rules, such as the fast-track procedure in Congress called reconciliation. That is the case with the interest rate cut, and it is also the reason why the 2001 and 2003 Bush tax cuts expire.
The College Cost Reduction and Access Act’s student loan interest rate reductions will take place in increments as outlined in the table below. Loans disbursed in each year shown will carry the reduced interest rate for the life of the loan. A freshman entering college in the fall of 2008 will have four sets of loans at four different interest rates. And no borrower will have more than one year’s worth of loans at a rate “cut in half” of what it was in 2006, because only those loans disbursed in 2011-12 carry the 3.4 percent interest rate. Loans issued in the 2012 school year revert to the current 6.8 percent rate. (Click here for an explanation of why the rate cut phases in and reverts back.)
The most a borrower could save under the new law’s interest rate cut is $216 a year ($3,240 over the life of the loan) on a maximum cumulative debt of $17,125 repaid over a 15 year period. That works out to $18 a month. Many borrowers will save less because they will not qualify for the maximum loan amount, or because they will enter college after 2008 and will not be able to take advantage of each year’s lower interest rates before they revert back to 6.8 percent.
…And More Fine Print
The interest rate reductions only apply to Subsidized Stafford loans, and only for undergraduate study. Unsubsidized loans -- which are similar to subsidized loans except they accrue interest while a borrower attends school -- will continue to carry the current rate of 6.8 percent. Borrowers can qualify for either federal unsubsidized Stafford loans or subsidized, or a mix of the two, depending on the adjusted gross income (AGI) of a borrower’s parents at the time he or she attends college and their school's cost of attendance. Currently, about two-thirds of Subsidized Stafford loan recipients come from families with an AGI under $50,000, while one-fourth come from families with an AGI between $50,000 and $100,000.
The Policy Problem
There is a fundamental issue with the interest rate cut. Eligibility for the reduced interest rates is calculated based on the pre-college income of the student's family, with no regard for the student's earnings after graduation day. Moreover, the borrowers who qualify for the loan will not benefit while in school, but over the 10 to 20 years the loan is in repayment.
The NCES Baccalaureate and Beyond Survey suggests that years after graduating, the incomes of students with subsidized Stafford loans and those with non-subsidized Stafford loans are the same. Therefore, the interest rate cut provides a subsidy to students who come from low-income families, despite the fact that over the years of repayment they earn just as much as the borrowers who did not qualify for the lower rate loans. Is anyone surprised? After all, college is supposed to equalize earnings and employment opportunities. In short, the lower rates are a poorly targeted subsidy.
In sum, the interest rate cut isn’t as much of benefit as advertised, nor is it targeted to those students who need it most, at the time when they need it most.
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Another example
I strongly support progressive policies that make college more affordable for low-income students, but you also have to wonder about the ethics of lowering the loan costs for a low-income student who goes on to pursue a career in investment banking, while keeping loan costs high for a student from a wealthy family who pursues a career in social work....
What help comes for the rest?
The student loan industry developed out of a desire to make higher education more accessible to low-income students. However, the desire to make higher education more accessible seems to have its roots in the belief, touted in our popular national image as well as some renderings of our Constitution, that we are a society where talent and hard work are to pay off, where class background should not matter in attaining "the american dream".
However, there are many specific issues that need to be addressed, and in order to address them, there needs to be an in-depth understanding of the relationship between the knowledge about the value and workings of money with which a working class, or low-income, student comes to the educational environment and the psychological impact of achieving "success" or "the american dream" on decisions to take out loans. There are many a past student who did not fully understand the impact of such large loans on their future standard of living, or the possible hurdles (economy, health, and so on) to achieving their goals even given the fact of successfully completing an higher education degree. These students are the ones who are suffocating under a decision they made that was not fully informed in the same way that the decision might be informed had they the background of a family that has had money and experience with planning and managing money. If you don't have a lot of money, and are not surrounded by people who have professional positions that pay well, you don't have the experiential understanding of taking out a loan against your future.
There needs to be help (relief) for those who are suffocating under the burden of school loans they have already taken out. Their future earnings are affected because money is necessary to further develop a professional career. But if all of their income is taken to pay a school loan, their professional development is stunted--another factor not understood when making a decision about school loans if one does not have experience with the professional world. It doesn't take an economic specialist to understand that if future earnings are stunted, less money is available to actually pay back school loans.
Many people who have school loans to pay off have also suffered due to ecomonic swings in the job market as well as due to health issues. There are currently no relief programs that would stop the interest accrual on school loans (both subsidized and unsubsidized) under conditions of extended unemployment or underemployment (though they do have limited relief for subsidized loans for short-term problems) or extended health issues. We all know how expensive health care can be, especially if you do not have health insurance (which, we know, many young adults just coming out of college or graduate school do not have). A school loan can increase by half in a matter of years with the accrual and capitalization of interest, such that a total loan of 80,000 becomes 120,000 due to factors that are well beyond the control of the individual. This is undue hardship, since the payments increase on a person who may well have been indisposed from the workplace and may enter with a lower salary than the years out of school may suggest would be probable.
These are some of the issues that I can think of that need to be addressed. To be quite frank, I am suprised I do not hear more stories of people comitting suicide due to the stress of school loan debt, and the effect it has on quality of life issues.
Further, there are far more occupations that provide valuable public services at lower salaries than those indicated by the government. Working as a professor, for instance, while a professional position, does not always mean a lucrative salary, and may be in the service area of low-income students, and so on. The criteria need to change to make the program more equitable. This may make the process more complex, and require more oversight, but it would greatly increase the number of people who would be offered relief, if that, indeed, is the real motivation.
Duh!
I have been trying to get people to see this debacle since Congress began speaking about doing something like this. It amazes me that members of Congress are patting themselves on the back for this one. Anybody with a calculator can see that is isn't going to be as good as they say it is. This article hits many topics on the nose, but misses two key factors: 1- because of these changes, FFELP lenders are going to reduce, if not cancel, all borrower benefits. Students actually did save money by having a decent, non-greedy lender (emphasis on the non-greedy because the biggest moneymaking lenders had the worst benefits in the business and didn't save students much if anything on their payments). We are all seeing that change as borrower benefits are being cut so that lenders can stay in the business and still provide good service to clients (unlike Direct Lending whose service lackluster at best).
The other key factor, 2- the name of the bill is the "...Cost Reduction Act...". Where is the cost reduction? In my state, some schools tuition and fee rates jumped 30-40 percent in one year. You think that lowering my student loan interest rate and causing my borrower benefits to go away are going to help me better pay for college? College costs are going up and congress did nothing to stop that or slow it down. Over the next several years my student loan interest is going to go down, but my cost to go to school is going up at a much faster rate. I fail to see the cost reduction in that.
The bottom line is that Congress blew it. If you question what I am saying, grab your calculator and do the math. Students will not be saving money over the long run, FFELP lenders are beginning to leave the business, students will actually be paying more in the long run, and schools can still raise their tuition and fees to the extend they want to. The Democrats are salivating with the prospect that the Direct Lending program will pick up the slack as lenders bail out. A warning to students: if this happens, say adios to any borrower benefits (that translates into higher payments), any decent customer service, and many frustrated and unhappy financial aid officers because the customer service they are getting from lenders will replaced by sub-smart governement employees that know little if anything about the Federal Student Loan Program.
I'm done now. Back to work!
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