For all the criticism the government takes for poor money management, they really do know how to bring in the revenue. They may not intend to bring it in, but they bring it in.
For example, the U.S. government has investments poised to make 55 cents on the dollar. And these investments are also almost impossible not to collect.
And these investments are you. Or at least those of you with government loans from law school.
Steven Harper, author of The Lawyer Bubble: A Profession in Crisis (affiliate link), reviews the problem — and the less than stellar proposed solutions coming from Congress and the White House…
As much as the government profits off law students, it’s easy to forget that a lawyer’s undergrad loans play into this equation as well:
The interest rate on subsidized federal student loans is currently 3.4 percent, but it will jump to 6.8 percent on July 1 and covers just a slice of the market anyway. For undergraduates who don’t qualify for the subsidy, it’s already 6.8 percent. For graduate students (including law students), the rate is 7.9 percent.
Almost eight percent! Rwanda, a country that had a genocide less than 20 years ago, can get investors to take the plunge for less.
Unlike Rwanda, there’s almost no risk that the government won’t get its cash back. The government spends big bucks hiring the financial equivalent of Dog the Bounty Hunter to get money from struggling graduates, and the courts almost never discharge student debt (unless you’re this guy).
The program is a moneymaker for the government. According to a February 2013 Congressional Budget Office report, the federal government makes about 36 cents in revenue for every student loan dollar it puts out. Graduate (and law) student loans are especially lucrative — 55 cents on the dollar.
The government certainly needs cash. Every time I cross a bridge I think about how much money the government needs. But students seem hardly the demographic to target for profiteering. Government loans are ostensibly an investment in human capital, but once the expense of schooling is skewed to make these loans a necessity, charging high interest while the economy tanks is an investment in the same way Vegas “invests” in helpful slot machine technology.
Well, this sounds like a problem, so our crackerjack political leaders must be on this:
As the July 1 deadline nears, proposals that seem to be gaining traction in Washington would preserve all above-market rates and the student loan program’s profitability. They also suggest that we’ve learned little from the subprime mortgage debacle. The House recently passed Rep. John Kline’s (R-MN) bill, resetting the graduate student rate at 4.5 percent above the 10-year Treasury, subject to a 10.5 percent cap.
In the unlikely event that the House bill gets past the Senate, President Obama has threatened to veto it. However, he is willing to have students borrow at a lower variable rate that’s still significantly higher than the 10-year Treasury, but with no cap (although once set, the rate would remain for the life of the loan). Combining the floating rate elements of the House proposal with the president’s plan could produce a truly disastrous compromise. The president also wants income-based repayment and debt forgiveness. Because Republicans with blocking power oppose those partial remedies on the grounds that it will encourage students to take on bigger debt, those proposals seem doomed.
“Disastrous compromise.” Delicious.
Harper also notes a couple of outlier plans. Senator Elizabeth “Screw You Banks” Warren proposes that students be allowed to borrow money at the same rate banks borrow from the Fed, a symbolic suggestion to force Congress to recognize that the U.S. values billion-dollar banks over young students. This proposal isn’t going anywhere because everyone else in Congress already recognizes this state of affairs and is just fine with it. Harper thinks Senator Kirsten Gillibrand has the best suggestion of setting all student loans at 4 percent, but thinks that will fail because it makes sense.
Harper concludes by offering his plan:
First, those running institutions of higher education should be held accountable financially for their graduates’ poor employment outcomes. Otherwise, federal dollars will continue to worsen the situation as administrators focus myopically on filling classroom seats to maximize tuition revenues. Allowing the discharge of educational debt in bankruptcy and permitting the federal government to seek recourse from schools that impoverish their graduates with tuition loans might alter some schools’ worst behavior.
A second principle should be even easier to implement. No mechanism for funding higher education should convert our kids into profit centers.
Silly Harper. He will be much happier when he accepts that law students are the batteries that fuel the Matrix.
Law Schools Are Turning Our Kids Into Profit Centers [Business Insider]