Yesterday President Obama spoke to a group of students in the White House, urging them to tell Congress to pass an law preventing student loan interest rates from doubling on July 1 from 3.4 percent to 6.8 percent on federally subsidized student loans.
It’s ironic that Obama felt the need to hold a press conference yesterday to blame Congress for failing to step up to the plate on student loan interest rate cuts. The President himself hasn’t been a model leader on this issue. If he had cared enough to take an interest before now, he might have learned a thing or two about why easy access to and low interest rates on student loans are bankrupting America and its youth.
As a Senator, the president missed the vote on the bipartisan College Cost Reduction and Access Act— which initially installed the student loan interest rate cuts — twice.
The President could not be bothered to so much as show up and vote when he was in the Senate. (Perhaps because he was too busy campaigning?) But as his support among young voters wanes the President has developed a new-found passion for student loans and for actively catering to a block of voters that overwhelmingly supported him in 2008.
Obama says the increases will lead to more than $1,000 of extra costs for college students; the increase would actually, more accurately, lead to $1,000 increase in costs over the life of a loan, usually ten years. Furthermore, the interest rate on the loans was always 6.8 percent. Congress temporarily halved the rate. Now rates are set to return the level they were before and were always intended to be.
Both Democrats and many Republicans – including Mitt Romney – support the extension of lower interest rates but the parties disagree on how to fund it and both parties are attempting to portray the other as obstructionist. House Republicans passed legislation that maintain the rate cuts, which would cost $6 billion annually, by by tapping into money directed by ObamaCare. However, Senate Democrats shot down the bill and the White House threatened to veto it it passed.
Senate Democrats proposed funding the bill by ending tax cuts for some small-business owners. Senate Republicans blocked debate on that bill based on opposition to tax increases on small businesses during tough economic times.
However, Obama’s speech and Congress’ debate on federal student loan interest rate cuts miss two points.
One, our system of easy cash through the federal financial aid system has had the unintended consequence of creating too many college graduates and increased the cost of college attendance by increasing the demand. Pursuing a college education as the default option for high school graduates ignores labor market basics—we still need nurses’ aids, plumbers, truck drivers and hairdressers. For people who do not measure up academically or do not need four-year degrees, trade and vocational schools should not be stigmatized. By overpricing and over-subsidizing student loans without receiving a return on investment, subsidized student loans are poised to very well become the next housing bubble.
Obama is right that student borrowing now exceeds all credit-card debt. Student debt is also doubling every seven years (roughly). And now a troubling rise in defaults – exceeding 8 percent - on student-loan debt exists.
Is the payoff of ensuring a college education for everyone, as Obama claims is necessary, worth it?
According to the National Review, in the United States there are now “19,000 parking-lot attendants, not to mention 80,000 bartenders and over 300,000 restaurant waiters and waitresses, with bachelor’s degrees.”
The second problem is that students need jobs when they graduate so they can pay off the principal on all the loans the have taken out. However, our economy is not creating the jobs necessary to employ the number of college graduates entering the workforce. With national unemployment at 8.2 percent, and one in two recent college graduates out of work, a 3.4 percent federal student loan rate – that affects a small portion of federal loans, no less - will neither help students find a job to pay of their loans nor substantially affect their bottom line.
By overpricing and over-subsidizing student loans without receiving a return on investment, subsidized student loans are poised to very well become the next housing bubble.
While Obama encourages students to tweet Congress with #dontdoublemyrate, we students should be tweeting the President #dontdoublemyunemploymentrate.
How Congress eventually decides to address the student loan interest rate debate is unclear, but as the debt ceiling debate, entitlement reform and countless other recent debates have shown, it will likely be bad news for the market and will push addressing the real issue of student loan debt and youth joblessness to another day.
And they advise students not to procrastinate.