July 10, 2013

DEMOCRATS DIVIDED OVER STUDENT LOANS: The Hill: Warren Rips Manchin On Student Loan Proposal. “Liberal firebrand Sen. Elizabeth Warren (Mass.) blasted a fellow Democratic senator Tuesday as a dispute over student loan rates escalated divisions within the party. The clash, which is highly unusual among party colleagues in the upper chamber, came at a private caucus meeting about a subject that is helping Republicans land blows against their Democratic opponents. . . . The bipartisan plan endorsed by Manchin and the others would set interest rates for undergraduate Stafford loans at the 10-year Treasury rate plus 1.85 percent. It would set the rates for unsubsidized graduate Stafford loans at the 10-year Treasury rate plus 3.4 percent.”

Here’s some recommended reading on the problem, which transcends Warren’s rather simplistic take.

UPDATE: Related: Student Loan Pretenders: New evidence that subsidized debt is harming borrowers.

Government researchers continue to show that federal student loans are hazardous to both students and taxpayers. But Senate liberals don’t seem to care, as long as the money keeps flowing to their constituents in the nonprofit academic world. . . .

The Congressional Budget Office recently estimated taxpayer losses on student loans at $95 billion over the next decade. Meanwhile, researchers at the Federal Reserve Bank of New York have been tracking the harm to young borrowers. Student-loan debt used to be a rough indicator of economic progress, because it meant that the borrower was attaining higher levels of education, long associated with higher incomes and lower unemployment.

But in recent years an historic surge in student-loan debt is changing education for many borrowers from a winning investment into a staggering burden. Such debt has nearly tripled since 2004 and now hovers around $1 trillion, with defaults rising on student loans and other types of debt held by these young borrowers.

Whereas credit scores used to be similar for young people with or without student-loan debt, New York Fed economists find a divergence after 2008. “By 2012, the average score for twenty-five-year-old nonborrowers is 15 points above that for student borrowers, and the average score for thirty-year-old nonborrowers is 24 points above that for student borrowers,” they note in a recent report.

Fed researchers are now struggling to understand the impact on markets such as housing and autos given the “lowered expectations of future earnings and more limited access to credit” for those who made large leveraged bets on education. Many of them must now delay starting families and buying their first homes.

The problem here isn’t an insufficiency of credit. It’s that prices are too high.

ANOTHER UPDATE: Student Loan Compromise Pits Dem Against Dem.

MORE: Reader Nathan Brindle writes:

I had student loans in school that totaled about $20,000 by the time I left grad school (in 1993). (Obviously I didn’t attend an Ivy!) The only reason they didn’t total $30,000 was because I had a fellowship for one year of grad. And I paid the $20K off in 10 years – no consolidations, although I did take three years of deferral while I got settled into my new job (which had nothing to do with my degree tracks, FWIW).

What I can’t understand about student loans is this: The government thinks it’s OK to loan tens of thousands of dollars to 18-22 year old kids with no jobs and only imagined prospects on no more than a handshake and a signature. And it guarantees those loans, too, even it if will pursue you to the grave to pay them back. Some kids end up with enough in student loans that they could have bought a house, instead.

And there’s the rub. No bank would give a mortgage loan to a 18-22 year old with no job and no prospects on no more than a handshake and a signature. Not only would it be a dangerous risk, but it would be bloody immoral on its face to do such a thing to a young person just starting out in life. Why then is it considered appropriate and moral to load up the same cohort of kids with mortgage-sized student loan debt?

What exactly is so valuable about a college education that warrants mortgage-sized costs to get one, when so many students fail to complete their courses of study (and probably shouldn’t have been in college anyway)? I worked for the university when I was in grad school, and let me tell you, I met a LOT of students who were only there because some high school guidance counselor or their misguided parents had pushed them to attend.

Higher education bubble, indeed. Let that sucker pop, let the bad and mediocre colleges and universities wither, and let a million MOOCs bloom in its place. Let professors compete for students. Because competition is good!

I think we’ll see that.

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