President Obama’s student loan plan is essentially a campaign stunt that will provide little relief, foot taxpayers with the bill, and do nothing to address rising tuition costs.
To start, in order to qualify you must have at least $28,000 in student loans when you graduate, which in turn means you could save anywhere from $4 to $8 per month. But if you really don’t feel like paying off those debts, you could just wait 25 years.
Long after the President has left office, the government will just forgive your debt and taxpayers will cover the difference. Isn’t it nice to be able to hand out goodies today, knowing you won’t be responsible for the costs down the road?
The trouble is, most of today’s college students will be taxpayers two decades from now. We’ll have to pay one way or another. The government can’t just wave a magic wand and make all our financial woes go away.
Furthermore, this plan attempts to address the symptom (debt) of the problem rather than the disease (cost).
In fact, this plan incentivizes students to ignore costs and encourages colleges and universities to increase tuition rates, which are already going up at astronomical rates.
The inhibitions of a perspective borrower are set aside when government steps in and reduces the risk attached to a federal loan. We have less reason to make fiscally responsible choices due to the fact that future losses are socialized. If you decided to take the more cost effective route of attending a state college like UAA or serve in the military, too bad. You’re going to have to help pay off the loans of Ivy League grads.
And it’s not just us UAA students, but many blue-collar and low-income workers with no college degrees will have the bear the burden. When the President spoke of “spreading the wealth around,” who knew he meant from top to bottom?
The second problem is that federal loans in general are actually the biggest driver of the inflation in education costs. The government has made it easier for Americans to attend college through these loans, which means colleges and universities have the incentive to increase prices.
In a normal market, the ability and willingness of people to attend college would be hampered by costs; however, because the government hands out loans that would often be ordinarily too risky for private entities, there is no shortage of students. It’s a simple illustration of supply and demand. When the demand increases, so does the price.
In the end, this vote-buying handout only kicks the can down the road and puts the costs on the backs of those who made responsible choices as well as our fellow low-income Americans who are most vulnerable in this down economy.
The United States is drowning in debt. While our government drowns in public debt, incurred from inefficient spending and imprudent tax cuts, citizens are drowning in student loan debt. No wonder the Occupy Wall Street protestors are upset. Debt from student loans is expected to surpass $1 trillion dollars within the next few years, surpassing credit card debt to become the second-highest form of private debt, just behind mortgages. Really, this shouldn’t come as a surprise. The cost of education is skyrocketing out of control. The college tuition inflation rate (in 1986 dollars) is 500%, compared with an overall consumer price inflation rate of 119%.
Moreover, like mortgages, college tuition must be paid on a fixed schedule. This means that someone with debt is required to make payments, regardless of their income. Other countries, such as Britain and Australia, make student debt payments contingent on reaching a certain income threshold. Thus, if a student cannot find a job immediately after graduation, his loan payments are deferred until he can. This greatly reduces the risk of defaulting on a student loan. The current default rate on student loans is at an all time high of 8.8%. Additionally, this incentivizes people to attend college. If students don’t have a powerful fear of defaulting, or severely damaging their credit, then they’re more likely to acquire a college degree.
President Obama’s recent student debt relief plan is a step in the right direction. His plan, which would allow students who cannot earn enough to make their loan payments to make a lower monthly payment 10% of their discretionary income, could save some students hundreds of dollars a month.
Obama’s plan does three things. First, it results in real economic benefits students graduating in a poor job market. Second, it restores confidence amongst graduates. And third, it demonstrates a continued investment in college education.
The unemployment rate for people with college degrees under the age of 25 is currently around 10%. The average amount of student debt in the Untied States is around $25,000. This means that roughly 300,000 recent graduates are left scratching their heads, wondering how they will pay off their debt. Under Obama’s new plan, as many as six million American students who qualify for the debt reduction program could consolidate their loan payments and reduce their monthly payments by as much as $1,000 a month. This seriously eases the debt burden on recent college graduates.
This ultimately restores confidence in an economy infected with economic malaise. Last week, I wrote about Occupy Wall Street and I discussed how much of the protest movement is driven by a profound dissatisfaction with our political leaders. Obama’s gesture to students across the nation is a sign that our president is responding to the needs of the American people. Some people, including Daniel McDonald, the other opinion writer for The Northern Light, believe that Obama’s use of an executive order is inappropriate. However, congress is broken. When our congressional leaders are concerned more with politicking than passing greatly needed policy, then Obama must find a way to lead. If leading requires him to issue a completely legal executive order in order to provide relief to millions of Americans, then so be it.
My hope is that Obama’s program is just the first step in a recommitment effort to education. The global market is fiercely competitive. Now more than ever, a college education is necessary to capture the attention of employers. Just look at the statistics. Overall unemployment in the United Sates for people without a college degree is 17%. For people with a college degree, it’s 4.5%. These figures speak volumes to the value of a college education. Without a degree, you have a one in five chance of being jobless. Though recent graduates struggle, the advantage of a college degree cannot be understated. Obama is heading in the right direction, but we need to do more. Debt relief is a short-term fix. Ultimately, policies that combat that ballooning cost of education will be needed. If we as Americans fail in our pursuit if higher education, then it won’t just be our economy that suffers. It be our children, and the generations that follow.