Interest Rates Are NOT the Problem When It Comes to Student Loan Debt (Originally Posted 9 May 2012)

From my perspective, the whole current debate about student loan interest rates is a big, red herring.  Worse yet, it is a shameless ploy by Democrats (especially their top guy in the White House) to try to paint themselves as being the party that cares about the young voters.  Unlike those heartless Republicans who, if Paul Krugman is to be believed, only care about keeping their billionaire supporters happy.

Yeah, great idea.  Obama killed it with the youth vote in 2008.  And he needs to do everything he can to get those same voters and their younger brothers and sisters to show up at the polls this November.  But with more than 50% of college graduates under 25 either unemployed or underemployed, I think it is an attempt to divert attention from the bigger picture.

I sympathize with recent college graduates in a lot of respects (maybe more later).  But the interest rate they pay on their student loans is not one of them.  Somehow, people seem to have forgotten what interest rates represent.  There are three key factors that affect the rate of interest that someone pays (this isn’t meant to be a post on economics and I’m not an expert, but all it takes is a basic level of understanding): 1) the lender’s current cost of money, which today, thanks to Ben Bernake, is very low; 2) the lender’s expectation about the value of the future dollars that will repay the loan, i.e. the future rate of inflation; and 3) the risk that the borrower will default on the loan.

If there is no inflation expected in the future and no risk that the borrower will default on the loan, then the interest rate that the borrower should be required to pay shouldn’t be much more than the lender’s cost of money – the lender presumably isn’t in business for kicks, so they probably need to make a little spread over their cost of money, at least enough to help pay for their operating costs.

When I graduated from Penn, I had a crapload of student loans.  And I think the interest rate on them was something like 8.5 or 9.0%.  As far as I know, student loan rates have always been subsidized – the 8.5-9.0% rate on my loans was less than the rate at which a lender would have been willing to lend to me or my family directly if we had just shown up at the bank and tried to get a loan, the only security for the loan being my future earning prospects after graduating from college.

It took me 10 years after graduating, but I paid off those loans in full.  Would it have been a bit easier to pay them off if the rate I was charged was 3.4% or 6.8% rather than 8.5-9.0%?  Hell yes, but the difficulty of the student loan debt burden is influenced by several other factors of much greater significance than the interest rate on those loans.  Off the top of my head, a few of those factors:

  • The absurd rate of increase in the cost of a college education over the past 30 years.  This has led to a large increase in the principal amount of the debt that a college graduate leaves college with.  If college costs were rising at or near the rate of inflation over the past 30 years, the principal balances would be significantly less, making the impact of the interest rate much less of an issue.

So if you want to REALLY ease the burden, go after the root cause – what is costs to attend college these days.  Limosine liberals don’t care how much it costs to send their kids to their alma mater (or some other satisfactory institution if they couldn’t manage to buy their way into their kids top 10 choices).  For the rest of us, it matters.

  • Student decisions should be based on the amount of debt they are forced to take on.  Some of those decisions:
    1. Don’t go someplace you/your family can’t afford.  You don’t need to go to an Ivy League school to get a good education.  In fact, you probably shouldn’t go to an Ivy League school if your primary goal is to get a good education!  Getting a good education is more about the effort you put into it rather than the brand name on your diploma.
    2. Don’t get a degree that does not have value in the marketplace.  If your family has the financial wherewithal to write the ticket for your college education and to support you for the rest of your life, then by all means, go ahead and get a degree studying some extinct Othodox Christian monks living above the Arctic Circle in Siberia.  Otherwise, learn something that might actually help you get a job in the real world.
    3. Spend a good portion of your time in college actually studying.  I love the movie Animal House, and I have made reference to it before.  But it may have been one of the worst things to ever happen to college education.  Because it glorifies all the shit that happens at college that has nothing to do with getting a formal education.  All that social stuff is important, don’t get me wrong.  But for every one person I have ever met who said they wished they had partied more in college, there are at least 20 people who say they wish they had studied harder.  You are supposedly going to college to get an education.  So make sure by the time you leave, you’ve actually learned something worthwile (and unless you plan on becoming a professional beer guzzler, learning how to shotgun a brewski doesn’t count).
  • If the economy isn’t growing and creating enough new jobs for college graduates, suppressing the interest rate on their student loans isn’t really going to solve the problem.  Oh wait, I’ve got an even better idea.  Let’s just forgive that debt altogether.  That’ll fix it.  Let’s just call Glenda, the Good Witch of the North, and ask her to wave her magic wand to make all that debt disappear without any consequences or impact elsewhere in the economy.  Right.

I’ve got a better idea.  Stop all the bs policies that are hurting, not helping, the economic recovery, get the hell out of the way, and let the American people get on with the task of creating new businesses and new jobs.  They have done so in the past, and if given the opportunity, they will do it again in the future.  All it takes is an elected class who understands that it is the American people, at the grass roots level, and not more government, that is the answer to our current economic problems.

Sounds like the basis for another post in the future.


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