Student Loans: Get Ready for the Noise — A Lot of It
The total debt students owe in the U.S. is well past the trillion-dollar mark and a large number of borrowers’ opportunities are getting crushed under this mountain of debt.
Politicians, smelling pockets of voters, are getting into the student loan debate, offering relief and finding villains to demonize.
Sen. Elizabeth Warren, D-Mass., spoke this past April about the student debt crisis on a very irreverent and edgy Daily Show episode.
Her emotional appeal likely got many people fired up — it appears the big bad government is profiting off the backs of poor students! Horrible!
The senator stated that the government is “on track” to make $66 billion off the backs of students just from the period of 2007 to 2012! Outrageous!
What the senator did not mention is that this is an unlikely scenario.
Her conclusion depended on an analysis of the present level of defaults. But she did not account for future defaults, ignoring the student loan program as a continuous process.
I am sure a lot of people could get fired up over the Daily Show piece. That is the intent! I would love to see some reasoned and thoughtful discussion of this issue. My opinion is that this piece is the same as the rhetoric from any other politician, fitting the facts to the narrative.
Donald Trump has recently aligned with Warren, calling for the elimination of government “profit” from student loans. Neither Warren nor Trump go as far as Sen. Bernie Sanders, I-Vt., who calls for all public colleges to be “free.” As noted earlier, free for one is only at a cost to someone else.
Presently, student loan default rates overall exceed 10 percent, and they exceed 15 percent for several classes of borrowers.
A portion of loans from each of these years is not yet subject to repayment, hence not yet subject to default. With over $450 billion in federal student loans issued during this period (2007-12), and a small percentage of that going into default, the $66 billion return will disappear or, at a minimum, shrink to something quite less shocking long before the government finishes collecting on these loans.
The time period used was likely chosen to make the specific (dramatic) point.
How would this stack up against other time periods? Say, for example, the five-year period before this one, or the five years before that? Probably it would be a horse of a different color. There would likely be more defaults. The scenario would probably not support the senator’s point. Why use facts when they don’t work for you?
Warren also stated, quite correctly, that the federal government does not refinance student loans. Good point, well noted. Private lenders, however, do refinance student debt. This point was absent from the televised discussion. For many graduates, this is a viable option.
As a financial adviser, I frequently see graduates refinancing their loans at rates of 3 to 4 percent.
The ones the banks won’t refinance probably should not be refinanced by the government either, as they carry a higher risk of default. Warren indicated that student loan interest rates are very high, with students paying at rates, in some cases “over 10 percent.”
Federal loan rates as depicted by NerdWallet have been 7.64 percent or lower since 1993. The highest current rate is 7.21 percent on graduate PLUS loans.
I should note that these loans are indexed to Treasurys with a cap at 10.5 percent. No one is paying this rate, which is the maximum they could get to. I concede there may be someone out there with a student loan from before 1993 with a rate over 10 percent. This is possible but doesn’t reflect the current problem.
The big issue with student debt from a political point of view is who is going to fill the gap.
If we charge students less money through lower interest rates, then we need to collect money from someone else to cover the cost of the defaults and other expenses. This means the taxpayers pick up the slack.
So if we lower interest rates today, former students will have more money to spend. And somewhere out there a taxpayer has less to spend.
I agree student loan debt is a problem. Shifting it to other taxpayers is one political solution. Hopefully, there are others.