In trying to contrast himself with a supposedly balky Congress, Barack Obama has rolled out the first two in a series of unilateral executive actions to “heal this economy.” The first attempted to rescue homeowners from foreclosures by refinancing mortgages that are, er, current with their payments. The second adjusted caps on student-loan payments in an effort to give college graduates more money to spend each month. More disposable cash means more spending, which in a consumer-driven economy means growth … right?
In theory, yes. But buying an extra four Slurpees a month probably won’t cut it. The Atlantic runs the numbers on Obama’s changes, and finds that Obama must have meant change literally. The most significant change announced was the ability to consolidate balances and trim the interest rates on the loans, a change that applies to all student loans, not just direct loans. So how much will this consolidation save former students? Two Starbucks lattes at best (via Instapundit):
How much would an interest rate reduction of up to 0.5% affect payments?
For the average borrower, the impact would be small. In 2011, Bachelor’s degree recipients graduating with debt had an average balance of $27,204, according to an analysis done byfinaid.org, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.
Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn’t going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50.
Obama’s biggest change will, on average, put $8 in the pockets of student-loan debtors. In contrast, Obama’s Making Work Pay tax cut added about $8 per week to the paychecks of all workers in the US for more than two and a half years. Did this lead to an economic renaissance? Not exactly.
The more-discussed change that Obama imposed was a reduction in the cap of disposable income that some former students had to pay. The Atlantic explains that this modifies a program currently in place to cap some at 15%, which has 450,000 participants at the moment. However, that program also has a max income cap that participants can’t exceed — and it’s not likely that the expanded program will get expanded participation:
Student loan balances have really only ballooned over the past decade. So this change would affect very few Americans over the age of 32. For the young adults who it may effect, we must remember that educational attainment has some correlation to income. Those with the most debt will have attended business school, medical school, or law school. Most of those people will also have higher incomes, making them ineligible. For a person with the average student debt load, their annual income would need to be lower than $32,000** to qualify. The average income for Bachelor’s degree holders aged 25 to 34 is $40,100.
The biggest problem we face in student loans is their escalating cost to US taxpayers and borrowers alike, especially now that Obama and the Democrats in the previous Congress nationalized the industry. But the loan program itself has created that escalation by artificially producing demand that pushes prices up for tuition, which then increases the amounts needed for loans. It’s a bubble with some similarities to the housing markets prior to 2008, where government intervention for a presumed social good (every child should go to college/every family should own a home) transforms into massive market distortion and unsupportable credit burdens relative to value. The Atlantic includes this eye-popping chart that shows the disconnect:
The loans no longer reflect the gains in disposable income from the benefit of the college education they finance. In that sense, it’s very similar to the disconnect between inflation and housing prices seen from 1999-2008. Student loans have become an irrational instrument, with its ability to bury their recipients far more than their education liberates them. In short, they are unsustainable, and the education bubble will have to burst at some point in the future, probably sooner rather than later. We should focus, then, on finding ways to move away from this unsustainable model rather than put taxpayers even more at risk for the credit crisis that will shortly arrive on our doorsteps.