A bipartisan group of senators reached agreement July 17 on a plan to restore below-market interest rates for newly issued, federally subsidized student loans. The plan was immediately hailed as breakthrough by President Obama, and the legislation is expected to move quickly through both chambers of Congress. But like most fast moving bipartisan plans in Washington, this deal is terrible public policy. The student loan program itself is fundamentally flawed. Congress should scrap it and start over.
The same day that United States Senators announced their bipartisan deal on subsidized loans, the Consumer Financial Protection Board issued a report estimating that federal student loan debt passed $1 trillion. Total debt, including student loans from federal and private sources, passed the $1 trillion mark in 2011 and is now more than $1.2 trillion. Americans owe more in student loan debt than in credit card debt. And today's average college graduate enters the labor market more than $27,000 in the red.
|Once borrowers start missing payments, their credit scores suffer, which can prevent qualifying for a mortgage, buying a car or starting a new business.’|
Managed responsibly, debt can be a powerful financial tool that allows those with good ideas, or underdeveloped talent, to access the capital they need to reach their full potential. But at it's core, debt can also severely limit an individual's choices if not managed properly. For far too many young Americans, government-subsidized student loans have become a form of financial enslavement that robs the future of hope.
According to the Federal Reserve of New York, the percentage of 25-year-olds with student loan debt has grown from just 25 percent in 2003 to almost 50 percent today. And New York Fed data also shows that one in four student borrowers who have begun repaying student loans are behind on the payments. Huge debt obligations make saving for a house or car, or starting a family, next to impossible. And once borrowers start missing payments, their credit scores suffer, which can prevent qualifying for a mortgage, buying a car or starting a new business.
An entire generation of Americans is having their economic lives delayed or destroyed by a program that generates about $5 billion in revenue annually for the government. Worse, there is no evidence that college loans make higher education more affordable. In fact, most research suggests the exact opposite is true: More federal student loan aid leads to higher college tuition price tags, especially at private institutions. Just as federally subsidized sub-prime mortgages became a disaster for the millions of Americans it was supposed to help, government-backed student loans have become a slow-motion calamity for the young Americans it was supposed to aid.
Instead of inducing more and more Americans to go deeper and deeper into debt, the federal government should focus its efforts on breaking up the existing higher education monopoly. A good place to start would be by decoupling all federal student aid programs from the current college accreditation system. Only by expanding the universe of higher education business models can spiraling education costs be brought back down to earth for all Americans.