Monday, January 25, 2010

Obama’s Gesture on Student Loans

According to this morning’s New York Times, in his state of the union address Obama will call for a cap on student loan repayments. The formula will set a maximum of 10% of post-graduation income above a living allowance. Money not collected due to the cap will be replaced from the general budget.

Is this better than nothing? Yes. It removes a bit of the pressure on grads who face a harsh job market or who want to explore less pecuniary pathways in life. It also encourages students to borrow more for their education, which is a good idea if it allows them to cut back on the number of hours they try to work as they go to school, study, raise kids and cope with life’s other challenges. The cost of tuition has gone up relentlessly, and students have responded by trying to earn more, at the expense of their ability to graduate in a reasonable amount of time and remain sane in the process.

But why is this proposal so much less than it should be? For decades education policy analysts have been calling for putting student loan repayment on an ability to pay basis. Repayment should be set as a fixed percentage of income, with a proportionality between the amount of the loan taken out and the number of years of repayment. Some, who make a bundle, would end up paying more, others less. The system would be progressive and predictable. It would also pay for itself, which in principle frees up more public money for reducing tuition in the first place. (Obama would have lower-income students paying a little less, but no one paying more.)

There is a larger debate that ought to be held around using tuition to pay for the costs of public education. Outside the US this is much less common. One reason is that societies want to encourage more students to continue to a higher level, and studying is already challenging without adding financial pressure to the pot. Another is that they want to separate curricular decision-making in higher education from student preference, at least to some extent. If a college depends primarily on tuition to make ends meet, it has to give greater weight to student demand when deciding what courses to offer, which programs to expand or eliminate, what kind of teaching to reward, and so on. Obviously there are arguments on both sides of this debate, but the US has swung very far in the direction of demand-driven revenues. My college, which is nominally public, now gets the majority of its funding from students, not the state legislature.

The Obama proposal is small, small, small. I guess we are entering Phase II of his presidency, where he shifts to Clintonoid minimalism, a fine mist of minute policy droplets that bathes the public with good PR even if no one actually gets wet.


run75441 said...


The best thing the gov could do is reduce the Perkins, Stafford Loans and the Student Direct Loans to a 4% maximum interest and Parental Direct Loans taken out for Students at the same rate. That in itself would reduce a lot of the cost and burden of going to college.

Right now and readily available from Direct Loans, students who have completed school and are experiencing hardship "may" qualify for a 3 year "hardship" forbearance of interest on Student Direct Loans (government). The same can be acquired by consolidating under Direct Loans.

Obama's plan is thoughtful; but why not lift the ban on bankruptcy rather than attaching future SS payments, etc.?

BadTux said...

Outside the U.S., far fewer students go on to higher education, and most of them are from affluent families that could afford to pay tuition if they so desired because the lower classes attend schools that do not prepare them for college. In other words, free tuition in most countries is a wealth transfer from the lower classes to the upper class.

Which is not to say that we should not do something about the student loan program and about college tuition in general. The first thing would be to beef up the Pell Grant program to pay 100% of room, board, tuition, and books for impoverished students, and on a sliding scale basis continue the grants up to 400% of poverty level. That would give below-poverty-line and working-class kids something to shoot for -- if they did well in school, they had a chance at a college education -- rather than the current situation, where college is simply unobtainable for most of them without running up huge debts that, if they're one of the 75% who don't graduate from college, they'll never have any way to repay. That would knock out a huge portion of the student loan problem right there without doing a wealth transfer from the lower class to the upper class the way that free college tuition across the board does.

Then there's your point of indexing student loan repayments to student income. If the student's income is $14,000 per year because he took a job as a nurse in a free clinic and that's all they had the donations to pay for last year, we should not be expecting him to be paying back $500 per month in student loan payments. It simply isn't reasonable, that would be 2/3rds of his take-home pay.

But wait, wait, I forget... this would require spending money, and spending money on increasing the human capital of the United States is bad because it takes away money we could use to build bombs to kill people. Alrighty, then!

- Badtux the Snarky penguin

Peter Dorman said...


It was once the case that the US sent more, and a broader cross-section, of its population to college, but those days are long past. Actually, the US lags several other countries, and this is, or should be, what some of the anxiety is about. Check the current stats.

By the way, there ought to be a lot more anxiety about our abandonment of non-college-bound kids, but that is a topic for another day.

run75441 said...

Hi Peter and Penguin:

As Elizabeth Warren explains in her The Coming Collapse ofThe Middle Class," it was once the case that all one needed was a high school education and a good work ethic to succeed into the middle class. All of this was financed by the gov. Today, it requires a college degree which is paid for by the family and pre-school in order to get through that Middle Class door.

Direct Loans will work with a student to exact loan payment size. As of recent, they began to excuse loans also after 20 years of low or non-payment (you will see it in income taxes). You can get 3 years of nonpayment with no interest. The only thing lacking is bankruptcy protection.

Unknown said...

How about the student loan forgiveness act? The act that was made by Pres. Obama to forgive those borrowers whom have failed to pay their loan and to those who have defaults but should render full hours of community service as a repayment. Isn't a student loan forgiveness a good option?

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