Friday, October 28, 2011

Bribing young people with illusory money

In an effort to try to jazz up young voters to the fever pitch that helped him win election in 2008, President Obama made a pitch for their vote by announcing his executive order to ostensibly reduce their college loan payments.

However, in a detailed analysis of what would actually result from these changes, the Atlantic's Daniel Indiviglio runs the numbers and finds the promises to be less than they appear from the President's speech.
The first would clearly be the most significant, because it is aimed at helping more student loan borrowers. How much would an interest rate reduction of up to 0.5% affect payments?

For the average borrower, the impact would be small. In 2011, Bachelor's degree recipients graduating with debt had an average balance of $27,204, according to an analysis done by, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.

Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn't going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50. (links in original)
Between $4.50 and $7.75 a month? That would barely pay their Starbucks tab from one visit. It certainly won't do what Obama is pretending it will do - inaugurate consumer spending to jump-start the economy.

Read the rest of the post to see how little these promises would actually do for individual borrowers now or for the economy.

But actually helping address the problems of out-of-control college costs is not the point. The point is what most of Obama's recent speeches on economic policy have been - to deceive voters into thinking that he's doing a lot to address the problems that average people are facing despite the obstructionism of those evil House Republicans.

In the process, he's sacrificing the government's future fiscal security for a political promise today. By putting the federal government on the hook for these unpaid loans 20 years down the line, he's simply extending the dangerous policies that got us into the housing crisis to the college loan program. He's not financing these promises with free money, but with actual taxpayer funds that will end up coming out of those middle class pocketbooks he's pretending to be so concerned about.

And what about the message he's sending young people: it's alright for you to incur major debts in pursuit of your dreams and if those dreams don't turn out the way you hoped, the federal government will help you out. Don't worry about moral hazard - that's just some concept you would have learned in college if you'd taken any economics courses.

Another detail that young people might not realize is that the new cap on how much they'd have to pay back as a limit to 10% of their discretionary income only applies to people who took a loan in 2012 or later. So this promise only applies to graduated seniors and some graduate students. While that appeals to those in school now, it doesn't do much for graduates who are now trying to make it in this rough economy.

And what do you think will happen to college costs with even more federal aid being sent out there? Those costs will keep rising because that is what happens when you make a third party responsible for payments. Costs will continue to rise and more people will be facing those scary debts.

Until the education bubble bursts just as our housing bubble burst in 2008.