President Obama’s exciting “soft dictatorship” re-election strategy, in which he looks for ways he can get around Congress to buy votes with expensive bailout proposals, moved from underwater home mortgages to deep-sea student loans on Wednesday.
“Refinancing” is the hot catch phrase of the day, and Obama’s got some rather dramatic refinancing in mind for those student loans. Besides lowering the interest rates, and allowing students to consolidate private and government loans, he wants to accelerate the implementation of a program to cap student loan repayments at 10 percent of the debtor’s income – after a generous $10,000 deduction for “poverty-level” basic necessities – for a maximum of 20 years.
The current rules limit payments to 15% of income, with remaining debt forgiven after 25 years. Congress voted to implement the new caps in 2014, but Obama wants to use some executive hocus-pocus to jump-start them in 2012. You need only glance at the Occupy Wall Street crowds to see why. Indebted young people are a very carefully targeted Obama constituency. Just wait until they find out how much Obama has left them in debt to the government.
An analysis from Daniel Indiviglio at the Atlantic notes that given the means tests built into the program, making it available only to those with annual incomes below $32,000, the theoretically huge benefits of the Obama plan will translate in practice to something like $4 to $8 per month in immediate savings. Students who rack up really staggering debt loads for advanced degrees will usually end up with too much annual income to participate.
Remarkably, Obama claims this magical minimal debt relief “won’t cost taxpayers a dime,” as the Washington Times reports:
Speaking to a friendly audience of college students in Denver, Mr. Obama said the changes “won’t cost taxpayers a dime but will save you money and will save you time,” and tied the ever-rising cost of education to the nation’s lagging economy.
“Living with that kind of debt means making some pretty tough choices. … It could mean putting off buying a house. It may mean you wait longest to start a family,” he told the crowd, which erupted with cheers when the president spoke of moving ahead without waiting for Congress to act.
Having that extra $4 to $8 in their pockets should help a lot of low-income students get those families started earlier.
Of course, small benefits paid to a large pool of individuals over the course of many years can add up to sizable total costs. The Associated Press helpfully provides some more details of how the funding system would work: “A White House official says it doesn’t cost taxpayers anything because when the loans are consolidated, the government no longer has to pay a subsidy to private lenders on the Federal Family Education Loan Program loans.”
Does that sound like an adequate explanation for how lowering the maximum repayment on a student loan by 5% of annual income per year, and shortening the life of the loan by 5 years, won’t cost anybody anywhere anything? Keep in mind that the President is fiddling with over a trillion dollars in total student loan debt. That’s more than America’s total credit card debt.
Where does Obama get the authority to throw this heavily hyped bone to young voters? Simple: ObamaCare. As you may recall, that wondrous “health care” package also federalized student loans. It was presented as a cost-saving measure.
The big consolidation and refinancing scheme is making lenders nervous, since it would strip them of valuable assets. The interest income from a trillion dollars in outstanding debt is not chump change.
The possibility of future tinkering with loan balances will give nightmares to an already skittish credit market. Obama has toyed with the idea of mortgage “cramdowns” on an epic scale before. The notion of loans as an unfair trap that people need to be “rescued” from is gathering steam, from the “Occupy” protests to the White House. It’s tempting for politicians to promise “debt relief” they can achieve with a wave of the Big Government magic wand, to the cheers of a public conditioned to hate evil bankers. It’s not as if any “real” property is being seized for redistribution, right? It’s just the all-knowing, all-loving President erasing some horrid numbers on a spreadsheet.
The Obama student loan bailout also distracts students, and their parents, from the real question they should be asking: Why the hell is college so expensive? Why are people racking up gigantic loan balances for educations that have become an unreliable middle-class inoculation against menial labor and unemployment?
A big part of the answer is the same subsidy static that makes medical care so expensive: nobody really pays for their own college education. The government has been pumping gigantic amounts of money into the educational system, from absurdly expensive and underperforming grade schools, to insanely expensive colleges that aren’t exactly churning out capable graduates with marketable skills.
Education is one of the worst examples of rising prices coupled with declining quality in America. The cost of tuition has skyrocketed at many times the pace of inflation, income growth, or any other metric. The whole affair has become so unmoored from reality that student loan balances have become virtual targets in a political videogame. The true cost and value of a college education is a mystical secret that almost no one understands, least of all the kids applauding the promise of “debt relief” from government heaven.