Sunday, October 30, 2011

Obama tries to energize college students with free tuition

The Issue

Amid plummeting approval numbers and “Occupy” protesters’ growing outcry against onerous student debt, President Obama has announced a plan to circumvent Congress and modify the federal student loan program unilaterally.
It is a thinly veiled attempt to stir up his base of young voting adults.
The president wants to expedite provisions of a 2010 law that would lower the maximum required student loan payment from 15 percent of a graduate’s discretionary income to 10 percent, and forgive all remaining student loan debt after 20 years.

Hold it!

What?  Wait a minute.  Did I read that right?  Forgive a loan after 20 years?
Well then who pays the government back? Oh wait its not the government its the tax payers that need to get paid back.
Lets make a quick calculation here ...
Suppose a student takes a $200,000 loan to go to an ivy league school, pre and post grad of course.
Then the student needs to pay back that loan at 10% of his discretionary income.
Next, lets say the student graduates and gets a job in a sector that is non-profit and make $50,000 a year for the duration of 20 years. Assuming after taxes the person gets to keep $35,000.  So $3500 a year is required to be paid per year.  That would take 57+ years to retire $200,000.  The tax payers would only get back $70,000 of their investment in the student.
A loosing proposition in terms of investment.

Ok lets change some numbers here.  Lets assume $100,000 with being able to keep $75,000 after taxes.
After 20 years that still just $150,000 paid back to tax payers.
I haven't even added the interest on the loan which would create even more spread.

If you are a student reading this, it may sound like a good deal right?  Hey, borrow as much as you want, you only need to pay a portion back.  But that is really short sighted.  Everyone becomes a tax payer after your first job.  Thats the real graduation in life.  When you have to start paying for taxes, all of a sudden all thos income redistribution schemes don't look so good.

So whats the incentive for anyone to pay the loan back.  Even worse, whats stopping the colleges from raising the costs of college even higher than they already are.  Nothing.  As a matter of fact, this could be a conspiracy by colleges to get as much money as possible, knowing fully well students will get loans.

See my blog on college costs ...
Blame Colleges not the Banks for College Costs

So why the change? 

Its a political favor, meant to buy the votes of students now, because as they graduate and play and pay in the real world they would not go for this.
Maybe its a way to help enrich the colleges?  Those pension funds won't pay for themselves anymore.  Maybe Obama is trying to redistribute the wealth by creating these bad loans and forgiving debt owed to the tax payers.  Or it could be all of these.

Biting the students in the future

Have no doubt that this is unsustainable.  Just like the Social Security Ponzi Scheme.  This will come back to bite the student of today who benefit in the short term by creating overwhelming college costs for their kids, as well as contribute to the United States Debt Ceiling over time.
Plus this is being done without congress.  Ever since the whole student loan process has been moved to the government, politicians can manipulate the terms at will.  Obama used an executive order to make this change, which could prove illegal if challenged, or reversed when the next president gets into office.
The economy has changes political dynamics,  no longer are these hot button issues off the table as political suicide.  People want accountability, at all levels of government and this change shows the need for accountability.

So what is the solution?

Dont fogive any loans.  I can't get my bank to forgive my mortgage after 20 years, so why should a student loan be forgiven?
But that will put colleges out of reach for some people?  Maybe, but that is inevitable if the colleges continue to increase their prices higher than both the CPI index and inflation.  Eventually colleges will be forced to keep or lower the costs of tuition or make changes to their compensation plans or go out of business.  Worse yet, it will be a political funding problem for congress.
Colleges could also do something dramatic as well.  They could prepare our kids to be more productive when they graduate and compete for dollars by attracting kids to colleges that have proven track records of turning out successful students.

Call me cynical but I should have more than a piece of paper and a "rounded" education.  I should have a skill when I graduate.  Something I can make a living on, something .  But hey, I'm old school, not new school.


Government Repayment Terms
New college aid plan will increase tuition costs
Tuition jumps 8.3% Double Inflation
Obama changes tuition plan

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