Where can an investor earn a 7.9 percent guaranteed annual rate of return? Not 30-year United States Treasury bonds; they pay around 3 percent. Not other countries’ sovereign debt; some of the most economically fragile nations in the Euro zone sell 10-year bonds bearing interest rates of less than 6 percent—and it’s certainly not guaranteed.
Try your kids. The interest rate on subsidized federal student loans is currently 3.4 percent, but it will jump to 6.8 percent on July 1 and covers just a slice of the market anyway. For undergraduates who don’t qualify for the subsidy, it’s already 6.8 percent. For graduate students (including law students), the rate is 7.9 percent.
Big returns with no risk
The program is a moneymaker for the government. According to a February 2013 Congressional Budget Office report, the federal government makes about 36 cents in revenue for every student loan dollar it puts out. Graduate (and law) student loans are especially lucrative — 55 cents on the dollar.
These eye-popping returns are especially juicy because the loans have virtually no risk of non-repayment. If a student defaults, the feds retain a collection agency to pursue the money (total cost of all federally retained debt collectors last year: more than $1 billion). Eventually, they’ll get it because such loans are in that small category of debts that survive a personal bankruptcy filing, along with alimony, child support, certain fines, and taxes. An exception for debtors who can demonstrate “undue hardship” rarely applies.
How did this happen? Good intentions went awry. In the 1960s, Congress followed economist Milton Friedman’s earlier recommendation that the government provide direct loans for higher education. The underlying principle still resonates: a society’s investment in human capital pays long run dividends. The corollary is that those who benefit personally should repay loans for the education that gives them a better life.
Unfortunately, as that better life has become more elusive for so many, the student loan program has converted struggling young people into profit centers for the government. In the trillion-dollar world of educational debt, students entering the professions — including law — are among the most unfortunate victims, in part because both their tuition and their loan interest rates are the highest.
The special plight of young lawyers
Lawyers generate little sympathy from the rest of the population. But 85 percent of today’s law graduates have educational loans exceeding $100,000. The grim market for new attorneys means that only about half of them are finding full-time long-term employment requiring a legal degree. Even fewer earn enough to repay their staggering loans. (Before blaming these young people for their plights, take a close look at the behavior of many law school deans who misled them into the profession with deceptive information about post-graduate employment prospects. Meaningful transparency on that topic is a recent phenomenon.)
As the July 1 deadline nears, proposals that seem to be gaining traction in Washington would preserve all above-market rates and the student loan program’s profitability. They also suggest that we’ve learned little from the subprime mortgage debacle. The House recently passed Rep. John Kline’s (R-MN) bill, resetting the graduate student rate at 4.5 percent above the 10-year Treasury, subject to a 10.5 percent cap.
In the unlikely event that the House bill gets past the Senate, President Obama has threatened to veto it. However, he is willing to have students borrow at a lower variable rate that’s still significantly higher than the 10-year Treasury, but with no cap (although once set, the rate would remain for the life of the loan). Combining the floating rate elements of the House proposal with the president’s plan could produce a truly disastrous compromise. The president also wants income-based repayment and debt forgiveness. Because Republicans with blocking power oppose those partial remedies on the grounds that it will encourage students to take on bigger debt, those proposals seem doomed.
Recently, Sen. Elizabeth Warren (D-MA) offered her first bill. For a year, it would cut the student loan rate to 0.75 percent—the same rate that big banks get on their borrowing from the Fed. Unfortunately, a prospective one-year solution is no solution at all. Sen. Kirsten Gillibrand has the best current plan: set a 4 percent rate for all student loans and allow graduates with existing debt to refinance at that rate. But that won’t happen, either.
As policymakers grapple with the growing educational debt bubble, they might consider two governing principles.
First, those running institutions of higher education should be held accountable financially for their graduates’ poor employment outcomes. Otherwise, federal dollars will continue to worsen the situation as administrators focus myopically on filling classroom seats to maximize tuition revenues. Allowing the discharge of educational debt in bankruptcy and permitting the federal government to seek recourse from schools that impoverish their graduates with tuition loans might alter some schools’ worst behavior.
A second principle should be even easier to implement. No mechanism for funding higher education should convert our kids into profit centers.
This is just another among many examples of the mean-spirited, small-minded, petty outlook that permeates the GOP. Whenever I see this attitude, I wonder, do these people have families? Are those families thoroughly ashamed and embarrassed by their (predominantly) fathers’ harshness and corporate whoring? Don’t their children take them to task, e.g., “Gee, Dad, what’s wrong with you? How can you take such heartless stances? Don’t you have a conscience?”
I can see your premise since I have a son who is a lawyer and who continues to pay on his law school loans in a stagnant work market where there is little business. However, education in any form is the key to success. Maybe the graduating law student won’t find a job in a law firm, but his law expertise might serve a corporation or even his own start-up company well. I notice today how the “progressives” are starting to discount the advantages of education, weighing the altruistic against the practical. They are saying maybe not everyone should go to college. B.S. everyone needs as much education as he can get. And if he can’t afford it, take classes in continuing education a year at a time for as long as it takes. There are so many benefits to being well educated. To dismiss education because it’s expensive is nuts. Nothing worth having comes easy. Let’s not be drawn in by a dumbed-down culture. Where there’s a will, there’s a way. Get that education and see how far it will take you.
“Maybe the graduating law student won’t find a job in a law firm, but his law expertise might serve a corporation or even his own start-up company well. ”
Two things – that’s a big ‘maybe’, and it’s one which law school deans don’t actually support when they say it.
Second, this expertise costs $100K – $250K (or more!).
My Father’s generation worked hard hours in menial and manual jobs with the idea that they were going to give their kids a better life they never had, and invested in those kids for a better world.
Today, sorry to say, this current generation operating for profit are living off the future of their kids who will carry the debt for life to make sure that “this administrative generation” lives a better life.
There is no real choice. The Brokerage on degrees has become a lucrative wealth fund for people that are claiming to build a better society. The only betterment is for themselves and hypocrisy is not even a pallor on their faces.
Bruce, your conclusions indict a larger, deeper institutionalization (and attempt at legitimization) of greed that began, IMO, during the Reagan administration, when “tax cuts” became the simplistic, blunt-force financial mantra of public policy, at least on one side of the aisle. Stripped of their “helping the middle class” masking rhetoric, tax cuts translate to “more for me,” because the primary, and largest, beneficiaries of tax cuts are those subject to a high tax rate and amount, i.e., the wealthy.
The movie “Wall Street” was a caricature of this phenomenon. Ever since, the “more for me” movement has gathered momentum. It’s no surprise that the most recent class to be harmed are people’s own children. This is merely another manifestation of an offensive trend that’s been in place for 30 years.