More on Student Loans

In his syndicated column, Jacob Sullum runs through the arguments against student loans and the unintended effects they may have on education costs.

A story in today's Washington Times does a bit more of the math: If the Dems manage to pass a law cutting interest rates on need-based loans from 6.8 percent to 3.4 percent, "It ultimately would save the average student borrower about $4,400 over the life of a loan." Recall that college grads on average make $1 million more over their lifetimes than high school grads.

The cost of the program, which would be phased in slowly until 2011? The Dems say "$5.85 billion over five years. The National Taxpayers Union said the original version from last year would have cost $37 billion." It's not clear what NTU estimates the current version will cost.

Last year, Kerry Howley looked at the panic over Generation Debt and concluded that college kids with $20,000 to pay off in loans were likely to do pretty well after all.

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  • ||

    "$1 million dollars over their lifetime"

    You don't get a lifetime to pay off your student loans. You get a set number of years, which also coincide with the period of your lowest earnings - while you are looking for and working your first job out of school.

    Maybe the answer is to extend the term of the loans.

  • ||

    How much more tax do they pay over their lifetime? How about their net contributions to federal and state goverments?

  • ||

    Why not just do away with student loans and resurrect the old GI bill, which is a grant? This is a proven method of financing higher education. If you need help with college financing then you serve in the military and earn your college financing the old fashioned way, by working for it.

  • ||

    "Maybe the answer is to extend the term of the loans."

    If they are federally subsidized loans you can do that. Believe me the banks love the idea of longer payoff periods because it increases interest charges. How about just making interest fully deductable on taxes? Studen loans are long term debt just like home loans. Further, they are loans on assets, an education, we want people to invest in. Why not give studen loans the same tax breaks as homes? This would also encourage people to work more because the tax break only helps when you have income to deduct from.

  • ||

    Student loan interest is deductible, if only for 5 years.

    You can get a 20-year term if you want.

    Furthermore, the people paying 6.8% right now are the same people interviewed for SI's fan cost index: People with no clue how to limit spending or where to find a bargain. Hasn't anyone ever heard of CONSOLIDATION? My rate is 3.25%!

    The arbitrage income that consolidation banks earn off the government is a whole different matter.

  • ||

    John,

    Your ideas are good ones for a problem based on high income earners with a very high cost to cover, which is not the problem we're facing.

    The problem we're facing is relatively low income earners - people just out of school - making loan payments that aren't really that large in the greater scheme of things, but which take a serious bite for a few years.

    By "extend the term," I should have said "provide a grace period before the payments and interest accumulation begins."

  • ||

    $20,000 to pay off in loans? Maybe for a four year community college. No, $20k is more like a yearly tuition nowadays, even at big state universities. And that's not including cost of living expenses. I'm going to law school in Chicago this fall, and looking at being anywhere between $100,000-$200,000 in debt at the end of just three years.

  • ||

    bchurch: $200K. Holy crap! You should skip the Gold Coast bachelor pad until you actually get a job.

  • Warren||

    Although subsidizing college degrees no doubt has produced more of them, this effect has not been as dramatic as is commonly assumed. "The large majority of the rise in higher education participation in America occurred before there was a major federal financial involvement," economist Richard Vedder noted in a December speech at the Heritage Foundation.

    OK for the record I am against all government involvement in education. There should be no grants or loans, no public schools, no Dept of Education, zero nadda zip.

    That being said, the quoted statement is just silly. Richard Vedder while noting that the GI bill had a dramatic effect on college enrollment rates after WWII, attempts to support this statement by looking at enrollment in 1970. But in 1970 the government was drafting young men and sending them to the other side of the planet to kill and die. If one wished to remain in the US, the best way to avoid this fate was to get a deferment by enrolling in college. The relevant data here is the plummeting enrollment rates in the late 70's after the draft had ended.

    Another thing that grate on me, is all the numbers being floated around about how much more a college grad makes without regard to what degree they earned. I went to school with more than a few Lib-Art majors who had to try paying off their student loans by saying "do you want fries with that".

  • ||

    bchurch, borrowing 100 grand to get a law degree is just an investment in yourself that is most likely going to pay off, unless you end up sucking as a lawyer. What kills me is that my wife to be borrowed over 100 grand to get a masters in divinity. She takes that vow of poverty s seriously.

  • ||

    Student loan interest is deductible for as long as you have the loan. The problem is the income phase-out is way low.

    Also, when you consolidate, you can chose an income-dependent repayment plan. This means when you're in a lean year, your payments are reduced significantly.

  • ||

    My student loans are 20 years at 2.63% and the monthly payment is around 100 bucks. I pretty much maxed out what I could take also.

    I will never miss that $100. There are people who spend 5 or 6 times that a month on something stupid like a Hyundai ( or beer, pot, strippers, furniture, whatever).

    And I am pretty much unemployed and unemployable. So most people with student loans and colleg degrees are doing a lot better than I am. Most grads probably don;t have their "low earning years" for 20 years.

    So no I don't feel their pain. I realize college loan debt was a pretty sweet deal!

  • ||

    bchurch:

    If you're really worried about expenses, try going to law school OUTSIDE of Chicago. PLenty of schools that offer lower tuition in rural areas along with lower costs of living.

  • ||

    There IS a grace period and deferments for those who cant pay.

    I actually chose to start paying mine early so I could consolidate

  • ||

    Well, if I really wanted to save the money I'd just forego law school all together-- but I know it's a good investment, and massive debt is a risk I'm willing to take.

    I'm not really complaining about my debt as much as I am objecting to the $20,000 number cited by Nick. I did my undergraduate at a big state "factory" school, and I don't know anyone who took out loans and ended up graduating only $20,000 in debt. Our yearly tuition was rapidly approaching that number when I graduated, due to double digit percentage yearly increases to tuition.

  • Woody Allen||

    Everything our parents said was good is bad. Sun, milk, red meat... college.

  • ||

    The $20,000 figure is what the proponents of increasing student aid routinely cite. I assume if they had better data that would make their case more attractive, they'd be using it. And it's worth recognizing that the vast majority of college students go to relatively inexpensive schools and that more and more attend part-time and/or live at home, which surely minimizes the amount of cash they pay out.

    Re: the liberal arts major jibe. English majors who graduated in 2004 had starting salaries of around $30,000. Which is not as much as enginering majors, but is not nothing either. More here

  • ||

    One thing I was hoping the article would mention is that student aid is a necessarily regressive transfer of wealth. You're taking money from everyone, including a great many people who never went to college and never will, to benefit people who are damned able to pay for it themselves.

    I'm paying off my loans now. It's hard, but not nearly impossible. So I can't afford a new car right now and I have a really small apartment for the next couple years. So what? It will pay off. Even if I'd taken every cent at the market interest rate it would still pay off.

  • ||

    At my state "factory" school, in-state (undergraduate) tuition and required fees total about $120 per credit hour. That adds up to $3600 per year for a full-time student. Several other states are pretty close to us, cost-wise. I don't see $20K as too low a figure for loans taken out.

    According to the Chronicle of Higher Education, total costs for an in-state residential student in 2005-06 averaged a bit under $16,000 at public institutions. Anybody who is paying $20K per year in tuition alone is getting hosed.

  • ||

    The logic behind low-interest student loans is that it's good for a society to have educated people.

    So forget how much more a college grad earns over his lifetime than a non-grad and consider how much more wealth he generates for society as a whole. Libertarian complaints about *gasp* the government spending money to promote education again illustrates knowing the cost but not the value.

  • ||

    Why not just do away with student loans and resurrect the old GI bill, which is a grant? This is a proven method of financing higher education. If you need help with college financing then you serve in the military and earn your college financing the old fashioned way, by working for it.

    Duh! It's aleady been tried and it worked! Why would we want to repeat our past successes when we can create new, innovative failures?

    Seriously, I would add national service (Peace Corps, tutoring, etc.) to military service. The caveat to that addition is that pay and sacrifice is commesurate with military service. As a 20 yr old, I worked 56 straight hours (with meal breaks) for the good ol' US Navy. Yeah, it needed to be done, but it really sucked.

    For those who have never had to deal with the difficulties and inanities of military life, teaching school six - seven hours a day, 5 days a week, with holidays off doesn't even compare.

  • ||

    The logic behind low-interest student loans is that it's good for a society to have educated people.

    I think the returns to society as a whole start diminishing rather quickly once you have good literacy, math, civics, and basic science. After that, yeah, education is great for society, but the major benefit is to the person getting it. It would benefit the economy as a whole, I bet, if I bought a house right now, so should that be subsidized too?

  • Guy Montag||

    The $20,000 figure is what the proponents of increasing student aid routinely cite. I assume if they had better data that would make their case more attractive, they'd be using it.

    Another theory: they just made up a number that sounds 'reasonable enough' that not many will challenge it. Sort of like the anorexia numbers and unreported assaults on women.

    Someone cited the deductability component. Yes, it is way low and the first time I thought I could use it I made too much money to qualify.

    Back when I was getting divorced, a judge in Knoxville, TN used my student loans in the income calculation for child support, but ignored the additional time my son was with me over-and-above the mandated 80 days per year. 'Somehow', the loan payments were not deducted from my income for the recalculation of the new payments after I graduated began working!

    Lawyermath is something that truly deserves further study.

  • ||

    Furthermore, there comes a point when we have too much education. The fact of the matter is that not every person needs a college education because not every job requires one. Well-paying jobs today require degrees precisely because everyone and their mother has one, not because an education's really needed.

  • Guy Montag||

    I kinda thought it was amazing that all of the fields that deferred people from conscription (I am quite against any draft btw) were touted as "truly needed and noble" suddenly lacked workers after the draft was ended.

    I guess all of those legal draft dodgers solved all of the inner city problems quicker than the Congress could surrender Vietnam.

  • ||

    Lord Duppy:

    Your point is well expressed.

    I think the returns to society as a whole start diminishing rather quickly once you have good literacy, math, civics, and basic science.

    You are describing a decent high school education. With that, and a library, you can learn anything you want (with, for me so far, the exception of quantum mechanics). But it ain't over yet!

  • ||

    I kinda thought it was amazing that all of the fields that deferred people from conscription (I am quite against any draft btw) were touted as "truly needed and noble" suddenly lacked workers after the draft was ended.

    Guy, the sad thing is that most of those "selfless visionaries" actually deluded themselves of their true motives.

    I've deluded myself also. It really is a bringdown when you finally are forced to admit it and face it. Unfortunately, that is the price of being an adult.

  • ||

    "I think the returns to society as a whole start diminishing rather quickly once you have good literacy, math, civics, and basic science."

    Yes and Hyderabad thanks you for that attitude. The folks there, along with folks in a number of other countries, have taken your formula to heart but have raised their standards to something more than "basic" science, literacy, and math. This exploitation of the "marginal" returns of education is starting to pay off for them.

    Funny, I thought that third world governments were the ones who set their standards so low. See, I'd like the U.S. to regain the edge that we once had, so I am for continuing to make advanced education more widely available through such measures as lower interest rates on student loans.

    Spin that politically however you please, but the margins are where the action's at. Seems a bit better than importing our engineers, doctors, and scientists from overseas at such high rates.

  • ||

    TN used my student loans in the income calculation for child support, but ignored the additional time my son was with me over-and-above the mandated 80 days per year. 'Somehow', the loan payments were not deducted from my income for the recalculation of the new payments after I graduated began working!

    Lawyermath is something that truly deserves further study.


    Cue Will Robinson's robot - "Math, lawyers, Does not compute, does not compute."

  • Guy Montag||

    Guy, the sad thing is that most of those "selfless visionaries" actually deluded themselves of their true motives.

    I believe the 'true motives' of the majority of that crowd were more along the lines of continuing a pre-school tantrum against anybody who told them there were consiquences for their own behavior. Just like the people here who say everything is the fault of the USA and will continue to do so for every traffic violation in Iraq after we leave.

    What happened to all of these do-gooders when much of Southeast Asia fled to the sea to escape the "compassionate new governments" that sprang forth after the Congress gave South Vietnam to the North? Yes, that's right, they ignored it or blamed America and even browbeat Joan Baez for mentioning it at all.

  • Guy Montag||

    See, I'd like the U.S. to regain the edge that we once had, so I am for continuing to make advanced education more widely available through such measures as lower interest rates on student loans.

    How are you measuring that edge? I measure it by innovation and productivity, where we do quite well.

    Some measure it by test scores that continually decline and are cited by certain professions as an excuse for more money and less work.

  • ||

    The analysis of this is all wrong. The article started with "proponents of the change believe ..." They don't really believe they're fixing some major problem in society. They don't care.

    What they're doing is buying votes. Plain and simple.

  • creech||

    Why are we making it easier for marginal students to attend college? Looking around these suburbs, it seems we need a lot more plumbers, electricians, home remodelers, and other tradesmen. Try to get someone to come by an quote. Then, the project can't be started for three months. Then the plumber charges $84/hr. to fix your running toilet.
    Around me, the people with second homes at the shore are the contractors, not the guy who got
    his b.s. in history or journalism.

  • Guy Montag||

    Around me, the people with second homes at the shore are the contractors, not the guy who got his b.s. in history or journalism.

    Maybe they are not the contractors, but they probably are the street mimes and bartenders.

  • ||

    Nothing says "trapped in an invisible box" like a philosophy degree.

  • pigwiggle||

    After that, yeah, education is great for society, but the major benefit is to the person getting it.

    Not quite. If it benefits the educated individual it must benefit someone else (likely many), otherwise they wouldn't be earning a good living. Folks don't just hand over their hard earned cash cause you're educated. Isn't that the heart of competitive advantage? The more you profit from our transaction the more beneficial it is for me.

    Spin that politically however you please, but the margins are where the action's at. Seems a bit better than importing our engineers, doctors, and scientists from overseas at such high rates.

    Low interest student loans aren't going to make or break these folks. Their loans really are a very good investment (irrespective of a few interest points), anthropologist or historians, not so much.


    Joe apparently doesn't have student loans, or is otherwise a very poor money manager. There are various remedies for his concerns; long term consolidation, income dependent deferment and repayment, and so on.

    I received two BSs and one PhD with less than 70K in debt. My wife has an MD with less then 150K. Sure, I didn't go to MIT and she didn't go to Harvard, but we get by. Oh, and I would love to have a cut interest rate in as much as any money I get back from the feds is a small return on what they have taken to begin with.

  • ||

    pinko,

    See, I'd like the U.S. to regain the edge that we once had, so I am for continuing to make advanced education more widely available through such measures as lower interest rates on student loans.

    Seems a bit better than importing our engineers, doctors, and scientists from overseas at such high rates.

    Are you an engineer, scientist, or doctor? Just curious, because I'm an engineer. In my masters degree I was in a lot of classes where I was the only American (including professors).

    Brain draining the rest of the world is not a bad thing for us to do. However, the real problem lies elsewhere.


    As an engineer, I have never had the experience of employers knocking my doors down to hire me. There are a few "flavor of the week" hot demand specialties that shift over time, but most of us engineers have to hussel to get jobs. My scientist friends tell me it's worse for them.

    Somebody tell me why they keep screaming about the shortage of US grad degrees in science and technology. If we go educate a new big wave of them, where the hell are they going to work? I don't see the jobs.


    Somebody said "engineers are some of the lowest paid smart people around". I am convinced that is partly because our profession is glutted with degreed engineers. And now we're finding that our work (engineering) is getting shipped overseas.


    I don't know exactly where in the economy our "edge" is coming from, but I don't believe it's just technology anymore. A lot of engineering that you used to have to do state side, is now routine enough that shipping it over to Korea, China, and India is no big deal. What was hard to do 40 years ago is more nearly like baking a cake today.

    Extreme example: 100 years ago, consistently producing high quality steel was difficult. Today any idiot can do it.

    What I see happening here in the US is that we're going to go even more high tech than we've been, but the number of people working it is going down. Intel, HP, even GE's commercial jet engine engineering, has gone overseas already, and the trend is continuing.


    So this is definitely true

    Furthermore, there comes a point when we have too much education.

    and it's definitely true of science and engineering.


    If anybody has a crystal ball that can see where our "edge" is coming from, now that science, technology, and manufacturing alone cannot explain it, I'd be interested.

    [and btw, gov't subsidized college is stupid for at least half a million different reasons in case I didn't make that clear yet]

  • ||

    Around me, the people with second homes at the shore are the contractors,...

    Considering that licencing regulations pretty much require anyone wanting to be a General Contractor to have a degree that is not a particularly good example.

  • ||

    Ah yes, licensing.

    You people willing to have your cancer treatment done by any twit who hangs a shingle out saying "M.D."? Yeah, if he isn't qualified and your cancer goes terminal you'll get to sue him. Fat lot of good that does you.

    The reason licensing and credentials occur is because we don't have the time and/or inclination to go around doing due diligence on every damn transaction out there. Libertarians never seem to realize this.

    And if you started again from the ground up I guarantee you'd end up with something looking like the exact same system. How do you people think that guilds got started?

    Sheesh.

  • ||

    When I graduated from a private college I had around $30K in debt. My parents taught me and now I looked at the $30K in students loans as an investment in myself.

    It took me about 7 or 8 years to pay off the loan, but that education put me into a situation where I was able to pay it off.

    Seems to me that college students these days think that it is their right to get a free education and that they shouldn't be hampered down with paying for that education.

  • ||

    I don't see that libertarians are opposed to licensing per se. Just opposed to government being the one who controls it all, and excludes everybody else by law.

    Lots of professional societies were setting standards and offering certifications before the government got into the act. Where do you think the first licensing standards came from?

  • pigwiggle||

    Grumpy-

    I don't think folks are so concerned about some licensing scheme that verifies competency, especially a voluntary one (of which there are numerous successful examples). Too often the license is used to protect profitable, but otherwise trivial procedures. Like the requirement for and inhouse dermatologist for spas that offer particularly aggressive facials. Or lasik, which is now well within the skills of a simple technician. And it's not just MD's. State's license barbers, waxers, and whatnot. It's a big racket; erect artificial entry barriers to jack up profits and protect existing business.

  • ||

    The problem with pointing out that college subsidies jack up tuition is that the politicians answer to the problem won't be to get rid of the subsidies. They will argue that education is an important public good (standards must be assured since its so important and we're spending tax dollars) and since public dollars are being spent on it colleges shouldn't be allowed to make huge profits (Big Education) on the backs of taxpayers- so the government should be able to regulate tuition, spending, and other decisions by colleges. You already see the beginnings of this argument in the recently released higher education report and the comments by the Republican in the Washington Times article.

  • ||

    They will argue that education is an important public good (standards must be assured since its so important and we're spending tax dollars) and since public dollars are being spent on it colleges shouldn't be allowed to make huge profits (Big Education) on the backs of taxpayers- so the government should be able to regulate tuition, spending, and other decisions by colleges.

    Sounds like what the defense industry already is [read: huge financial fiasco].

    Welcome to America where we used to be free, once upon a time, long long ago.

  • ||

    """The Democrats' eagerness to cut interest rates on student loans reflects a time-honored Washington maxim: If it's good, it should be subsidized."""

    Cutting interest rates do not equal to subsidizing. If so, Jacob must have been in agony when the prime rate was 1%.

    You can get 0% interest on a car loan, does that mean your car is subsidized by the bank holding the note? If so, by how much? Then we must play the how much interest should be on a car loan game. If a low interest rate is a subsidy, then what's a high interest rate?

    Some religions forbid making money on money.

    I wonder if the new law would affect those of us who have consolidated?

    Many people don't know that when you consolidate, they increase the term of the loan to 20 years. Unless you call and change it back to a 10 year loan (which I did) you pay MORE for your loan.

    Consolidating school loans is a scam to get you to pay more interest than what you would with the normal loan. I could pay $100 to $150 less a month, but I would be paying interest on a loan for 20 years instead of 10.

    """Are you an engineer, scientist, or doctor? Just curious, because I'm an engineer. In my masters degree I was in a lot of classes where I was the only American (including professors).""""

    Although the above was not directed at me, my experience was about the same. I had a couple of American professors. However, only one of my electronics professors was American. Most of them were from them were mid-east or Asia minor. Excluding one Russian.

  • ||

    Some of those certifications mean something--I had LASIK done many years ago and am damn glad I went to a medical clinic for the treatment. The healing was going wrong; they were able to identify the problem immediately and treat with little difficulty. Anyone who goes to one of those $200 bucks! Cheap! deals is taking his eyesight in his hands.

    I do think some of the certifications (beautician? Hair stylists? Cosmetologists?) do have more than a soupcon of extra barrier to them. (Heck, I feel this even more about legal stuff.)

  • ||

    Here's a denverpost.com commentary on the subject:

    http://www.denverpost.com/search/ci_4987336

    Fix the student loan mess
    By Alan M. Collinge
    Article Last Updated: 01/10/2007 07:20:43 PM MST


    When Congress amended the Higher Education Act 10 years ago, defaulted student loans became the easiest and most lucrative debt to issue and collect.

    The amendments imposed huge fees on defaulted student loans and took away bankruptcy protection for student borrowers. It banned refinancing of many student loans, and also allowed draconian collection measures to be taken against student borrowers, including wage garnishment, tax garnishment, withholding of professional certifications, termination from employment, and even Social Security garnishment.

    Harvard Professor Elizabeth Warren told The Wall Street Journal that "student loan debt collectors have power that would make a mobster envious." And no one makes the mobsters greener than Al Lord and his Student Loan Marketing Corporation, also known as Sallie Mae.

    Lord and current CEO Tim Fitzpatrick have made about $367 million since 1999, making them some of the highest-paid executives in the country.

    Sallie Mae stock has also gone up almost 20 times in the same period. Way more than Microsoft.

    There are only two ways to get that kind of growth with that kind of profit. 1) You do things smarter, better, fast. 2) Do what Sallie Mae did: get into a business where government assumes all the risk - guaranteed student loans - but where a private company gets all the reward. As a result, Sallie Mae became largest student loan company in America, bigger than most of their rivals combined.

    In the company's annual report, Lord attributed his company's 29% core cash earnings-per-share growth in large part to fees collected from defaulted loans. He forgot to mention that the law allowed him to forbid Sallie's customers from refinancing with competitors offering better deals.

    Meanwhile, the borrowers suffer.

    Many student loan debtors in default find themselves unable to function in society, and are faced with a decision to either continue the paralysis and live in fear, or begin making payments on a massively inflated amount - often double, triple or quadruple what they originally borrowed.

    StudentLoanJustice.Org has received thousands of stories from citizens whose lives have been shattered by their student loans.

    People who default on student loans are typically decent citizens who, for one reason or another, were not able to capitalize on their education.

    Most agree that they are responsible to pay back what they borrowed, but most cannot afford to pay back the wildly increased amounts that the federal law has allowed to be imposed upon them.

    The student loan system in the U.S. has been hijacked by Albert Lord and his friends. Let there be no mistake: These are not creative geniuses who invented a new product or service. These are not captains of industry who built markets and competed their way to the top. Rather, these are nothing more than well-connected executives who took an existing market and used their weight in Congress to erect insurmountable barriers to competition.

    Here are just two examples: Sallie Mae convinced Congress that allowing borrowers to reconsolidate student loans would cost taxpayers money, so they banned it. Then they sidestepped the law against inducements (also known as kickbacks) by permitting Sallie Mae to loan schools money to make student loans in the school's name, then sell them to Sallie Mae for a "commission."

    Imagine if any other business tried that. It would be ridiculous. Or illegal. For Sallie Mae, it was a business model.

    This cannot be what Congress intended when the Higher Education Act of 1965 was created. And it must be among the first things the new Congress fixes this year.

    Alan M. Collinge is the founder of Student Loan Justice in Washington, D.C. (studentloanjustice.org), a grassroots group of thousands of student borrowers.

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