This brief article on student debt at the Washington Post caught my eye. The article reviews a report which claims that for every one defaulter on a student loan, there are another two who are delinquent and who are falling further and further behind on their payments. The column isn’t very well written – it doesn’t actually give hard numbers on default and delinquency percentages, but it does raise another alarm bell for the absolute scam that are US student loans – including ones issued by the federal government.
The current US Stafford Loan program was consolidated by the federal government under the reconciliation provisions of the Affordable Care Act of 2010 (ObamaCare). This non-germane reform, which was included because reconciliation comes but once a year and the Senate needed to do all its business at once, reformed the Stafford Loan system so that instead of private lenders issuing the loans and the government backing them up, the federal government would issue the loans directly. This was a loss of a huge subsidized, risk-free market for the banks, so that was all well and good. But Congress decided to retain all of the existing provisions, including high interest rates and draconian prepayment and forgiveness conditions. The interest rate remained subsidized at 0% for annual loans up to $5,500 and 6.7% for every dollar above that to the maximum of $12,500 for undergraduates ($8,500 and $20,500 for postgraduates). What that actually meant was that the government continued to charge people aggregate interest well above the rate of inflation, and the subsidy expired as soon as the student left studies. In addition, the grace period to begin repayment after leaving studies was only 6 months. The result was that, in a time of unprecedented youth unemployment, the federal government was continuing to issue student loans that charged exorbitant interest and required immediate post-graduate employment to pay off. The government’s reforms had simply eliminated the middle man. It had not created a more progressive loan plan.
The danger, which the column highlights, is that students are still not aware of how strict and enormously stacked against the student the loan regime continues to be. The federal government issues loans that do not even cover the costs of most state schools. This means student already paying high interest to the government are still thrown back on private lenders – or they must be wealthy enough to be able to pay their own way without further loans. Guess who this benefits?
The current student loan system freezes social mobility, locks in excessive amounts of student debt, and was not reform so much as the takeover of a major scam from private lenders by the federal government. The private agency the government contracts to handle loan management, MyFedLoan.org, does not even have a mechanism on their website to enable loan holders to set up monthly interest repayments, thereby encouraging interest to accrue to the capital for the duration of the student’s studies, thereby creating an even higher debt burden upon graduation (or if the student has to drop out due to financial difficulties). The 2010 reform did no favors to anyone actually in need of student financial aid, and was passed in haste by a Senate more focused on legislative maneuvering than good policy. Anyone who does not read the fine print risks being caught up in a web now directly managed by their own government.
You can get a table of loans and interests rates here.