The middle class is shrinking. Those in power have run up enormous debts on public credit while shoveling most of the money into private pockets. The corporations that have benefitted from this borrowing binge, meanwhile, leverage the global trade system to transfer their profits beyond the reach of national governments.

Meanwhile, we have been told lies by Democrats and by Republicans, divided into artificial camps and led into debates that are either irrelevant or so dramatically scripted that we fail to realize every choice leads to the same result: the dismantling of the social framework that defined and sustained the opportunity of the last century. National mobilization of resources has given way to radical individualism under a narrative that, in the wealthiest nation in the world, we must always expect less.

In this tumultuous time, we search for a way forward - a new Square Deal for the American people.

Friday, August 19, 2011

The Crushing Weight of Student Loans

Americans owe a lot of money in Federal student loans.  By one calculation, the figure is $608.6 billion; that number may not be exactly right, but it's obviously going to be pretty close, plus or minus a billion.

How much the repayment of these loans costs each person varies.  Some borrowers are repaying under the standard ten-year terms.  Others have requested extended repayment (20 years), while many are under income-contingent (ICR) or income-based repayment (IBR) programs that offer substantially reduced payments. 

The interest rates of the loans also vary.  Since July 2006, all Stafford loans have been issued with fixed interest rates of 6.8%, and since March 2010, all GradPLUS loans have been Direct Loans with 7.9% rates.  Prior to that date, however, Stafford rates varied, and GradPLUS loans issued under the old FFEL program (a.k.a. welfare for banks) carried 8.1% rates.  Consolidation loans formed from these various products get fixed interest rates calculated as weighted averages of the loans that are being consolidated.

Despite this uncertainty, there are some certainties.  There are more Stafford loans than GradPLUS loans; the rates of these can each be no higher than stated above; and most people are not under ICR or IBR repayment. 

If we assume a ratio of 2:1 for Stafford to GradPlus loans, each with its highest interest rates, we get an interest rate of 7.17%.  Assume also that everyone repays on the standard 10-year plan, and the income to the U.S. government from student loan repayment would be no higher than $7.12 billion per month, or $85.44 billion per year.  (It is, for the reasons stated above, actually much lower; this is an intentionally extreme figure.)

If that number strikes you as substantial, it should; $86 billion is a lot of money to even the largest corporation on Earth, and would be massive to most of the world's national governments. 

Consider it in the context of the U.S. budget, however, and the number is less impressive.  For 2012, the United States estimates total revenues of $2.53 and $2.62 trillion dollars.  What's more, in that same year, expenditures are estimated between $3.52 trillion and $3.72 trillion.1

Now, put this in context. 

Student loans finance education; they are by definition investments, which is why the Federal government provides them at all.  We are given a means of pursuing education so that we can become productive, generate income, and contribute to the economy. 

So here we are, having obtained our educations, and rather than being able to devote the bulk of our income to positive economic activity, we are instead providing a revenue stream to the U.S. government that goes towards a massive budget deficit.  We, the ones who bothered to get the advanced knowledge needed to drive an advanced economy, are paying in some cases upwards of 25% or more of our gross monthly income to the government as student loan payments -- then we are paying another 25% or more in income taxes.

The student-loan repayment system is just a means of tapping the income of American citizens to instead provide income to the Federal budget.  It is, functionally, a tax -- one that by its nature is levied against those with relatively low levels of wealth, as these are ones who need to borrow to finance their educations.

Is there any wonder that recent graduates are not driving the economy merrily forward but are instead despondent and struggling just stay afloat?

A Bold Idea

Because Federal student loans are public debts; and

Because the debts of the U.S. government are the debts of the American people, who collectively depend upon the functioning of an advanced economy that requires educated people to not only administer but also expand it; and

Because Federal student loan repayments feed a Federal income stream that is just a small part of the total annual Federal budget shortfall against a mountain of debt; and

Because this comparatively small stream of up to $86 billion annually would be enormous in its stimulative economic impact if instead directed to productive investment; and

Because the total amount of debt owed to the American people is so much larger than the outstanding total of Federal student loans as to render even this sum virtually insignificant in the grand scheme of national economics;

Why not write off the total sum of current outstanding Federal loan debt for all American citizens and let everyone get to work on innovation and the creation of successful opportunities?

1 The difference depends on who you ask: in both cases, the higher figures come from the Obama administration's original budget request, while the lower ones come from the April 2011 plan put forth by Congressional Republicans -- the so-called "Ryan Plan."

1 comment:

  1. "Because this comparatively small stream of up to $86 billion annually would be enormous in its stimulative economic impact if instead directed to productive investment" -- well, if my student loan debt was erased, I would promise to invest (or spend) the money! xD