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Thursday, 25 July 2013 10:10

New Student Debt Law Is the Future Sub-Prime Mortgage Loan Disaster for Education

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studebtIt's not officially the law yet, because the House of Representatives has to pass it (which it will), but the Republican orchestrated student interest rate bill passed out of the Senate on July 24th is a variation on the Wall Street sub-prime ballooning mortgage scam. 

Why is that?

Because the "free market" Republicans tied student loan interest rates to market rates determined by the Federal Reserve.  That means current students will get a break because the Fed's policy has been to suppress interest rates to try and stimulate economic growth. But the Fed has been hinting that it may start raising interest rates given that the economy has picked up some steam.

And federal student aid must be reapplied for every year, so the interest rates may increase for each year, theoretically, in the course of four years if market rates increase at that time. As a Department of Education website warns: "When you fill out the FAFSA, you are applying for aid for a specific year. In order to receive aid the next year, you’ll need to submit that next year’s FAFSA." (FAFSA is the acronym for Free Application for Federal Student Aid.)

Thus, as the economy grows, interest rates for incoming students will rise in future years.  Fortunately, there are some caps to educational indentured servitude. According to the Houston Chronicle, "The bill also places a cap on interest rates, which will ensure that rates do not rise above 8.25 percent for undergraduates [receiving Stafford loans], 9.5 percent for graduates and 10.5 percent for PLUS loans [which are taken out by parents of students]."

Obama has pledged to sign the bill, but it was only passed out of the Senate because of the near unaninmous support of the Republican minority (only one "no" GOP vote), while 18 Democrats opposed it.  Among the opponents were Elizabeth Warren, Bernie Sanders and Jack Reed who supported amendments that were defeated that would have mitigated another monetized market-based approach to higher education.

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Most students at colleges and universities, along with their parents, are already reeling under higher tuitions and special fees resulting from "austerity" cutbacks.  Our public college and university system is eroding in quality and accessibility, threatening the future educational foundation of our nation's private and public institutions -- including the corporate world that profits from our public educational system. The great US higher educational system that has played an enormous role in creating the brain trust and creativity for our national innovation and wealth is in peril.

The bill that Obama will sign is another concession to the control of Congress by a minority of radical zealots who believe that even advanced education should be subject to the vagaries of the marketplace.

As Sen. Warren has pointed out, after the government assumed control of most of college and university student loans in 2010, it is now actually earning a profit (net reveunue) from indebted students, based on a Congressional Budget Office study.

Yes, this legislation differs from the sub-prime balloon loans in that a college student today will get a loan at a fixed rate for the life-time of the loan and not see it balloon.  But future students will be subject to the fluctuation of market-based rates and could see their loan interest rates potentially skyrocket as the economy expands.  And the overall indebtedness of advanced education students continues to grow due to the base costs of attending college increasing.

The Senate bill is a short-term bone thrown to needy current students getting their degrees -- and a time bomb for those planning on attending college or a university in the future.

Colleges and universities used to be a key vehicle for social mobility in the US, allowing persons of limited means with intellectual skills to equal themselves on the playing field of our economy and culture by receiving a first class education.

Given the rising sticker shock of many public colleges as the nation surrenders to the "austerity" meme -- not to mention prestigious private schools where four years can cost as much as a quarter of a million dollars -- they will be institutions increasingly limited in enrollment to those students from families with means, thus continuing to perpetuate an increasingly ossified oligarchy.

Also see: "Elizabeth Warren Introduces First Bill: Students Should Get Educational Loans at Same Low Rate as Big Banks, 0.75 Percent" (May 10, 2013, BuzzFlash at Truthout)

(Photo: hardtopeel)