Thursday, June 27, 2013

Will Congress Double the Debt of College Students on July 1st? Probably!

Student Loan
 Disaster Warning
When I paid off all $4k of my college loan debt, one year after leaving Peace Corps in August, 1975, it was a day to truly celebrate. More to the point, I'd done it by rigorously saving while in Peace Corps (even on a $125/month stipend) and also after landing my first job after the Corps - working as Head of the Science Dept. at a Barbadian Secondary School.

But make no mistake, that feeling of debt liberation never would have been remotely feasible had I not had the benefit of National Defense student loans at 1 percent interest! This was made possible under the National Defense Education Act (NDEA) of 1958, and the fact my first degree was in a hard science subject qualifying under the Act. The release of loan debt at such at early phase, then made it possible for me to marry in 1975 (the month I left Peace Corps) and also launch out on an independent life with my new wife.

Pity the poor college grads today, however, who are saddled with atrocious aggregate loan debt that now exceeds $1 trillion, and is set to get much worse. The Huffington Post in March, referencing a  New York Federal Reserve report, pointed out that the proliferation of indebted students and their families had knock -on effects on multiple other areas of the economy, including:

- Fewer people with student loans are buying homes

- Fewer people with student loans are able to secure and maintain decent credit ratings

- Delay in buying a car, hence having lower access to job availability

- Postponement of marriage

- Inability to rent because of high debt to income ratio, so having to live with parents

- Too many graduates (and even non-grads) encumbered by student loans can't pay them off efficiently because they can't access the quality jobs to do so (half of all the grads are found in jobs that don't require a college degree). They may then be prey to loan sharks or having liens placed on accounts, property.

As Malcolm Harris has long pointed out, since most student loan debt is government- backed  and can never be discharged, the type of meltdown the student loan explosion could precipitate is taking a different shape than the mortgage crisis, with the victims (student borrowers) already in place and struggling.

And the tragedy is that it's set to get worse, much worse.  On July 1, 2013 interest rates on many new federal student loans are set to DOUBLE (from 3.4% to 6.8%)  – meaning any college  education gets more expensive and more out of reach for millions of students and middle class families. All the problems highlighted above will therefore become much more intractable.

Readers should see some notes of resonance from what transpired last summer, when rates as on the Stafford loans, were also due to jump. But students took to Facebook and Twitter to barrage their reps and the higher debt noose was postponed. A patchwork law was implemented to keep loan rates the same, but that expires on Monday.

Basically, absent further congressional action, students are screwed as the interest rate on new subsidized student loans is scheduled to go up again. To stop this from happening, President Obama put forward a long-term solution that cuts rates this year on nearly all new loans, ensures that all students have access to affordable repayment options, and does not charge students higher interest rate to pay for deficit reduction. Sadly, the Repuke congress doesn't appear to be taking him on, and indeed, given their austerity mindset, is fully prepared to let students suck salt matter how many FB messages and Tweets they dispatch.

On the (slightly) positive side, the impending July 1st  rate hike will affect only undergraduates with subsidized loans, where the federal government absorbs some of the interest rate. This makes up about a third of government student loans, and they are awarded based on economic need.  Other undergraduate and graduate students who take out unsubsidized loans, have already been paying interest rates set at 6.8% since 2007.   But the point is that many more will now be put at the higher interest-debt level and that's not news students of modest means and their families want to hear.

As the website put it:

"Now is not the time to make school more expensive for our young people. As our economy continues to recover – at a time when interest rates are at historic lows -- the 7 million students who rely on these loans to finance their education shouldn’t face higher debt as they work to graduate, start a career or buy a house."

I could not agree more!

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