Obama's Student Loans Plan: Fair or Fraudulent?

In the aftermath of Pres. Obama's announcement regarding new measures to ease the burden of debt for strudents struggling to pay back their college loans, critics are beginning to circle.

According to CBS News, where the original plan would allow borrowers to reduce their monthly payments from 15 percent to ten percent of their discretionary income in 2014, "the president said he would use an executive order to make those benefits available to borrowers as early as 2012". The gist of the plan is to cap the amount required of college students for monthly loan payments to ten percent of their discretionary income.

On Wednesday, Pres. Obama told a crowd in Denver, "I know you're hearing stories from friends and classmates and siblings who are struggling to find work, and you're wondering what it's in store for your future. And I know that can be scary. This is something Michelle and I know about firsthand. I've been in your shoes."

Though Obama's plan for student loan relief may sound appealing to young people, some critics claim that the costs of forgiving student loans would have to be unfairly shouldered by taxpayers who never took out student loans and who never went to college. According to a NY Daily News article from Andrea Tantaros, Obama's move is merely increasing reliance on easy credit necessary for college. Tantaros: "As a policy, this plan is troubling and simply reinforces the culture of irresponsible borrowing that led to the housing bubble." Tantaros suggests that by forgiving student loans, the economic essence of taking out the loans in the first place will have been removed and borrowing will increase thereby increasing college tuition rates. Tantaros cites a recent report released by CollegeBoard explaining that college tuition rates are on the rise.

Conservative commentator Rush Limbaugh has gone so far as to suggest that Pres. Obama's plan is a "fraudulent solution" to the problem of rising college tuition. Limbaugh: "This is all a fraud. It's all about making the student-loan community think that he cares." In reference to a magazine article in The Atlantic, Limbaugh said that Obama's plan would save college graduates less than $10 per month. Limbaugh furthered his attack on Obama's plan, "These student loans are going to end up costing the taxpayers anywhere betwen $800,000 and $900,000 per student. The student on the loan repayment, if they make the payment, will save $8 to $10 maximum a month."

The article from The Atlantic written by Daniel Indiviglio that Limbaugh relied on analyzed the prospects of Pres. Obama's plan. Indiviglio: "By calling for these measures, President Obama seeks to respond directly to young Americans stressed about their student loans. Indeed, one of the vague objectives of the Occupy Wall Street movement is for student debt forgiveness." However, an updated article from The Atlantic also written by Indiviglio further modified, clarified, and expanded upon issues related to the precise amount of debt and the economic impact of Obama's plan.

According to Indiviglio's analysis, a student would have to have graduated with direct federal loans or government-guaranteed private loans "in excess of about $28,000" before he or she would see any payment reduction -- given the other respective necessary qualifications. Indiviglio notes that, "To be sure, this rule will provide some relief to the handful of borrowers who qualify", but do not expect to see changes as an immediate stimulus to the US economy.

Where the societal effects and economic impact of Obama's student-loan forgiveness plan may be debatable, at the very least the plan finally brings the issues of student loans and higher education to the forefront of the political discussion. As such, if one thinks of an average American paying 30%-40% taxes, if you add on the prospect of student loans at 10% of one's discretionary income, one has to wonder if perhaps simply increasing taxes and providing free public higher education (as according to the Nordic economic model) would be a better and more functional approach going forward.

Eventually providing some sort of government-subsidized higher education via taxation (in the same spirit as the Nordic model) appears to be where the debate is headed. Providing public higher education would most likely have some benefits for not only students and their families, but also the greater society. As per a 2010 article in Time, "Studies show that countries and states investing more in education, health and social security typically spend less on their prison systems." In an age where young people are struggling to make their way and get their lives started, one has to wonder what the long-term implications of Obama's plan portend. Is free higher education in America's future? With the prospects of forgiven student loans and government control over student loans, are we already at a point of free higher education? Should higher education really be a "right"?

I know that no one may want to hear this at this point in the debate, but the political question of a "right to higher education" may very well come down to whether an education (1) has inherent socio-economic/immaterial value in itself or (2) has economic value only in career potential, i.e. while keeping in mind possible future tax revenue, of course.

From an economic standpoint, such a plan to control student loans, reduce loan payments, and forgive student loans could make tuition costs skyrocket even further -- thereby increasing the number of students with large debt burdens and perhaps increasing the number of individuals who choose to not go to college. As any respectable economist knows, once the government puts price controls on an item whether it be underwear, oil, cigarettes, or higher education, there are eventually shortages and surpluses. A pack of cigarettes that may be $7 via state-run policy may be worth only $3 in the free market...thus creating a surplus of packs of cigarettes in the legal market. On the flip side, where there is shortage, a pack of cigarettes that may be $5 via government control may actually be worth $15 in the black market. Thus, state-controlled prices tend to create black markets. That being the case, there does not appear to be any growing black market for college degrees (aside from maybe a few outliers).

By providing forgiveness plans and reduced monthly payments to student loan borrowers, there is the strong likelihood that the market for higher education will become even more distorted than it already is. Nevertheless, even with the prospect of a distorted market for higher education, it's about time that Washington came face to face with excessive student loans and the stresses that they place upon young Americans trying to be productive and get their lives & careers started.

The other side of the coin here is that many students went to college to avoid the dire job market and/or because of sheer market dynamics. Unlike a house or a car, student loans have no underlying collateral with value. Where higher education may not be absolutely necessary for young Americans, some young Americans may feel compelled by virtue of labor market dynamics to go to college. In this way, providing some relief for recent college graduates may be fair. Either way, the crux of the issue does come back to taxation and unemployment. The debate may appear to be about forgiving student loans, but in reality, the issue goes back to questions about the role of government, proper levels of taxation, labor, and job creation.

To say the least, the issue of excessive student loans and the prospect of wage slavery appear to possibly serve as an albatross around the neck of younger generations. Where Obama's plan may only give younger generations hope, in an era where many young people have lost hope, hope can indeed be a valuable commodity -- for the sake of commerce and for reelection. We most likely have yet to see what the outcome of Obama's plan will be in terms of student loans and higher education costs.

This is definitely not the last we are going to hear on this issue before the 2012 elections; it will be interesting to see how the debate over higher education evolves.

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
Posted In: NewsPoliticsPsychologyEcon #sEconomicsHotMoversPersonal FinanceGeneralAndrea Tantaroshigher educationRush Limbaughstudent loans
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!