Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, October 18, 2011

Occupy Wall Street: Student Loan Forgiveness

Some Occupy Wall Streeters are calling for student loan forgiviness. This sounds like a great idea, especially for people like me with high debt. However, I disagree with this proposal. Rep. Hansen Clarke (D-MI) has sponsored a bill to forgive student loans and MoveOn.or is sponsoring a petition in support of this.

I do not agree with complete loan forgiveness. Nor do I think it should be discharged in bankrupcy court. They tried that once and young people ended up filing for bankrupcy at alarming rates. 1) moral hazard arguments still stand 2) So long as the price of education is inflating faster than that of medical care, student loans are going to be a necessary and permanent evil. We cannot create disincentives for lenders or further barriers to qualified students. 3)Currently, there is a new bubble forming around student loans as they are packaged and sold as derivatives. The chain reaction has been sent into motion just like the housing market. This will encourage larger loans to lesser qualified students, and further fuel rising tuition costs.

But the program rules should be changed to make the loans more fair on borrowers. I have some more moderate suggestions that I would like lawmakers to consider.

Some background: I graduated with my MA in 1999 with over $60K in debt- of which about half was used for tuition and the other half for housing and expenses. I took on this debt freely, but out of necessity. The job market requires a graduate degree, I needed the money to help pay for it. I consolidated my debt with the USDE at 7.26% interest, low compared to many of my predecessors.

When interest rates began to fall in the mid-2000s, I called the USDE to see about re-financing and was told that this was not legally possible. Once consolidated, borrowers are not allowed to refinance unless they are willing to take out a private loan, usually a second mortgage. I didn't own a home and couldn't afford one with my debt levels froms school, and even in 2004 most lenders were not going to provide a loan without collateral. Therefore, I continue to pay an interest rate more than twice the current market rate.

I do receive a tax deduction on the interest I pay. However, this is little help throughout the year as monthly bills come due. Nor does it adequately address the inherent unfairness (almost usury) in how interest is handled in the student loan programs. And let's face it, it isn't an asset-backed necessity like housing. So I'd be willing to sacrifice it for some real reforms.

Interest on student loans accrues daily. And no matter how much you pay beyond your fixed amount, the interest is always paid first and it usually eats up most of the payment. And what’s worse, it's a moving target. The amount I pay in interest changes constantly and is nearly impossible to budget for, calculate, or get around. To date, the amount I have paid back in interest is nearly equal to the principle balance I started with and I still have $42K to go. Currently, if I were to make payments so that I could pay the remaining balance in 10 years, I would have to pay over $750 a month, down from the over $800 I would have paid 10 years ago. Either
way, that's not possible. But the debt is still my responsibility, students still need loans, and the USDE needs the revenue stream these loans create.

Rather than forgive debt entirely, I would suggest the following:

1) that the law be amended to allow for refinancing of all student loans down to current rates
2) once the amount paid back in interest exceeds more than say 20% of the original principle, the interest should be curtialed entirely while the remaining principle is paid down.
3) if #2 is not feasible, then the interest should be regulated in the same way has home loans.
4) outlaw the selling of derivatives on student loans.

These changes would lessen the burden on borrowers without the moral hazard associated with total loan forgiveness or the loss to the lenders, which includes the USDE. They may be enough to prevent fueling education inflation. Making the terms a bit more fair would be welcome and would help the longer term economy and a generation of young people trying to get started in a jobless economy who will default in droves if we don't do something.


Raised By Republicans said...

Good points. I too have large student loan debt and would benefit enormously from having it wiped out (to the tune of hundreds of dollars per month). But, like US West, I don't think just forgiving all that debt is wise. I like US West's idea about allowing refinancing. I consolidated my loans later than US West and so my interest rate is about half of what hers is. I really do sympathize with her and I'd think it would be very reasonable for her to refinance.

I would like to make a clarifying quibble though about the price of education. While the price of a college degree has been going up, it's largely because of declining public support for education rather than dramatically increasing cost of educating students. Faculty salaries are flat lining or declining, depending on the field, in real terms - along with everyone else in the bottom 80% or so of the income distribution.

What's really changing is who is expected to pay for education. Once upon a time, it was expected that an educated person was a benefit to society as a whole and so the costs of that education would be shared. But for years now, the emphasis has been on putting the costs on the students themselves (or their parents). The problem with that is that if the costs are born entirely by the student, then either only the rich will get educations or - only the rich will get quality educations.

Brie like the Cheese said...

I agree with a lot of both your points, in fact I had a rather large debate on my facebook page about this very topic. I don't believe students should have any of their debt forgiven. I have zero debt, and am working towards an RN currently. The reason I don't feel forgiveness of their debt is a good idea, is simply, if they are forgiven, are the students who are currently going to school forgiven as well? And what about the generations who have already paid their debts, what do they get. Also, if these "students" want to talk about debt forgiveness, how about forgiving the mortgage on people's homes being foreclosed on. What about credit card debts?

Lower interest rates, lower minimum payments, and provide a solid structure on getting federal loans, grants and scholarships. Bring the minimum income from having to make under seven thousand dollars to something more reasonable, such as under fifteen thousand, in order to receive any federal funding.

But forgiveness? Your debt, is your problem.

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