Utter incoherence is coming from congressional Democrats and student financial aid associations at this very moment. They cry out: we need to make it easier for students to take out loans! And at the same time, they insist: Congress needs to do something about the student loan debt problem!
They are correct that something must be done. There is an impending student loan crisis. The Federal Reserve Bank of New York released a study last week that was a shock to many in higher education. The report found that the student loan delinquency rate is around 21 percent instead of the previously estimated 10 percent.
To put this in perspective, the average delinquency rate in other consumer loan industries (auto, credit, etc.) is around 10 percent. Twenty-one percent is very bad.
Furthermore, the total outstanding balance of student loan debt has hit $1 trillion. Compare this to national credit card debt of $693 billion and auto loans debt at $730 billion.
The default rate for student loans was 8.8 percent as of 2009, up from seven percent the previous year.
And guess who backs the majority of the student loans? The U.S. government.
The Federal Reserve report paints a dire picture. If something is not done soon many Americans could face a bubble even more harmful than the housing crash in 2008. Unlike mortgages, most student loans are not dischargeable through bankruptcy.
What can be done about this?
Obviously, the increase in student loan debt is tied to the ever-increasing tuition rates at colleges across the country. The Left’s solution is to make lending to students even easier. But many believe that it is the already easy access to low interest federal student loans that is causing the increase in tuition rates.
The recently-released budget plan from House Budget Committee Chairman Paul Ryan (R-Wisc.) states that “the decisions of colleges and universities to raise their prices would have been constrained if the federal government had not stepped in so often to subsidize rising tuitions.”
Paul Ryan offers this solution, among others: as opposed to offering even more in federal student aid as President Obama would like, let’s cut $9.5 billion in discretionary funding from the Department of Education.
This is a good, but tiny, first step.
The second step is completely unfeasible: make the Department of Education operate in the realm of economic reality.
What is the purpose of interest rates? They quantify risk to the lender and the borrower. What the Department of Education has done is suppress the interest rates on federal loans. In effect they have deceived the borrower and themselves on the risk involved with taking out this type of loan.
Remember that 8.8 percent student loan default rate? Interestingly enough, if you look at private loans, where interest rates are higher, you see a default rate of 5.1 percent as of the fourth quarter of 2011.
Truly accurate interest rates can only be tied to dynamic market realities. This will never occur when loans are provided by government bureaucracies that operate statically.
So what did student aid associations say in response to Paul Ryan’s proposed solutions?
“It’s troubling that anyone would think our long-term path to prosperity includes cuts to education spending” says Justin Draeger, president of National Association of Student Financial Aid Administrators (NASFAA).
What about Democrats?
Senate Budget Committee Chairman Kent Conrad (D-N.D.) said “His [Ryan] action is a breach of faith that will increase the likelihood of an unnecessary and harmful government shutdown later this year.”
Really? Personally, I would say the true breach of faith is Senate Democrats having not even created a budget in 1,041 days.
Conrad’s refusal to consider the Ryan plan at all indicates that congressional Democrats intend to stand in the way of any relief to the student loan crisis that the Republican House Budget Chairman’s plan has to offer.