But the Conquered, or their Children, have no Court, no Arbitrator on Earth to appeal to. Then they may appeal, as Jephtha did, to Heaven, and repeat their Appeal, till they have recovered the native Right of their Ancestors, which was to have such a Legislative over them, as the Majority should approve, and freely acquiesce in.
-John Locke

Thursday, October 27, 2011

Student Loans

There has been a theme coming from the White House in recent weeks.  It's this: Obama wants your vote.  Are you mad at Wall Street - not the actual street, but the bankers, or at least the ones who you have been told are responsible for getting us into our current Great Recession?  Obama is too, and he wants to teach those millionaires and billionaires a lesson, even if he has to take it out on people making a mere $250K a year.  Are you sick of the super-wealthy not paying their "fair share?"  Obama is too, and he's going to try to increase the capital gains tax, so that Warren Buffett et al pay a fair amount.  Obama and the media are not talking about the fact that the only thing raising the capital gains tax will do is remove any incentive for the middle class to make any investments whatsoever.  We can discuss later what this will do to retirement planning.  The point here is that Obama is engaging in class warfare because he knows the rich are a minority and he wants the majority of votes, even if it means dividing the country and retarding the economic growth.

Now he has realized that one of his biggest voting blocks - the young voters - are not too enthused about supporting him.  He wants those votes, so he has decided to "help" them on their student loans.  Let's take a look:

First, we can probably all agree that the cost of higher education is climbing out of control.  It is well-documented that student loan debt has increased at a rate that far outstrips the increase in income.  Part of the problem may well be that loans and tuition prices are locked in an upward spiral: as tuition goes up, loan amounts must also go up; as loan amounts increase, schools can increase tuition because they know that the loans available to students will increase.  Each enables the other.  Schools aren't honest enough to make a decision to stop spending money and control tuition, instead choosing to charge far more than their degree is actually worth.  The student loan people (now the Federal Gov't) have yet to put the brakes on the loan amounts. Defaults on student loans are up 25% in the past year!

So, enter Obama with a plan to help students, or, more specifically, the ones with loan debt.  His plan is to tie repayment into one's income, with a cap at 10% of that income, with a long-term cap of 20 years. One way of looking at this is to say, borrow money for school, and repay as much as you can over the next 20 years; just do the best you can.  Looking closer, this plan does nothing to help anyone who finishes school and goes on to be financially successful within a short time after graduating.  If you make enough money, you will pay back 100% of your loans.  But if you don't make a lot of money after graduation, don't sweat it - do your best and the rest will be forgiven.  Gee...this sounds very familiar.

The Atlantic has a useful article on the subject.  The author concludes that the 10% cap will really only impact people who make under $32K.  What is important here is to look at the amount of debt versus income.  the article correctly points out the correlation between educational attainment and income.  People go to law/medical/business schools because those graduates have a tendency to earn more. 

But it is all smoke and mirrors.  First, the it appears that the average holder of student loan debt would only save about $8 per month, with people who hold even $100K in debt saving maybe $28/month.  That is not the kind of money that helps people buy a home or a car; it's not even beer money.  Second, Obama has not conjured this "gift" out of thin air.  The 10% cap and 20-year forgiveness program are part of legislation slated to into effect in 2014; Obama is just moving it up 2 years.  Of course, 2012 just happens to coincide with the election.

The real question that will be answered next November is whether today's young adults care more about their future.  Rewarding Obama for an empty handout today is selling out the future of this country.

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