“The whole student loan problem is a problem that should be of deep concern to [Congress],” said Consumer Finance Protection Bureau (CFPB) director Richard Cordray to the Senate Banking Committee last April. “These are young people that we should care a great deal about.”
The public knows students are currently loaded with more debt than boomers or retirees carried. What most people I talk with don’t understand is that the problem stems from government policies and the advantages enjoyed by specific financial institutions. I’m going to describe how those policies affected students entering college in 2006.
About sixty percent of middle- and low-income students borrow annually, according to the Chronicle of Higher Education. Most of the loans are federal loans from the Department of Education. The students’ first loans carried a 6.8 percent interest rate because Congress fixed the interest rate instead of linking it to a floating rate as is done on mortgages.
Market interest rates market dropped after the financial crisis in 2007 and Congress authorized the DOE to begin lowering interest rates on new loans only for students in financial need, not middle-income students. But even the lower DOE rates did not drop as fast as its costs of money. Consequently, the DOE earned more interest income on every new student loan.
As the financial crisis hit state governments, legislators reduced support for colleges. Colleges increased their tuition. Tuition In Washington went from $5,888 in 2006-07 to $10,223 in 2011-12.
While being hit with increased costs, middle- to low-income families faced lower earnings. People lost work or took lower paying jobs. Savings rates declined. The percentage of people owning stocks in pensions, IRAs and personal accounts fell from about two out of three households to half, according to Gallup Poll’s 2013 annual Economy and Finance survey.
The squeeze of rising costs and lower finances forced students and families into borrowing more student loans.
During that time SLM Corp, popularly called Sallie Mae, the dominate private student lender and loan servicer in the country, significantly increased its education lending. Like DOE, it dropped its rates and fees but not as much as its cost of money dropped, according to the Huffington Post on May 9, 2013. Like DOE, Sallie Mae increased its interest income on loans to students and their families.
Sallie Mae had a second advantage. Demands for federal loans became greater than the DOE could provide, so students increasingly turned to Sallie Mae and other private lenders.
Sallie Mae’s dominance in the market is another advantage.
“We’re making loans to the parents and students, family education loans,” John Remondi, president and CEO. told investors in January 2013. “Their alternatives are fairly limited.”
The Consumer Finance Protection Bureau agrees.
“These excess credit spreads may be a symptom of insufficient competition,” said the CFPB report on student loan affordability.
Sallie Mae’s stock price rose almost five times in the last five years. Its 2012 return on equity was half again higher than the average firm in the S&P 500.
The total student debt nearly tripled over the past eight years, according to the New York Federal Reserve. All students who borrowed beginning in 2006 face a high percentage of unemployment or underemployment. They try to refinance but their credit scores are not strong enough to get better loans. Under current law students cannot shed the debts through bankruptcy, nor reduce the balances on loans guaranteed by the federal government. Thousands of complaints have poured into the CFPB.
Student debtors are falling behind on their payments. They are buying fewer houses and household goods than former graduating classes.
Several financial oversight boards, such as the Financial Stability Oversight Council, Treasury and Federal Reserve are warning that student debt threatens our economic recovery.
In sum, during a financial crisis, governmental policies and budget priorities increased hardships on middle- to low-income families while increasing profits for private financial lenders and their investors.
Governmental policies should be more compassionate for families striving to improve their children’s lives.
The Senate has passed a compromise deal that would restore lower rates for subsidized loans, but sets flexible rates that could soar in the future. The deal also sets a cap on the amount of students loans the DOE could lend meaning students would be forced into the private sector if their credit scores are acceptable. And there’s no guarantee they’ll agree on solutions.