Congress Skipped Town and Left College Students in the Lurch: Federal Stafford Student Loans and the Irresponsibility of Congress

 

By Linda Stamato

The “Fourth of July Quiz,” courtesy of the good-humored Gail Collins, appears in yesterday’s New York Times. It poses this question at the outset:

1. Just before leaving town for its holiday break, the House of Representatives finished up work on: a) The farm bill; b) Fixing the Voting Rights Act; c) Naming a Mississippi River bridge after Stan Musial.

There could easily be many more items on the list, given the irresponsibility of this particular Congress, but let me dwell on one in particular that is missing: the failure to prevent interest rates on federal Stafford loans—the most popular form of college funding—from increasing from 3.4 percent to 6.8 percent, which is about $1,000 per student. (You can find out all you need to know about the student loan rate hike here, courtesy of the Washington Post.

.And the Daily Beast provides a good summary of the complexities of the student loan business here.

Linda Stamato
Linda Stamato

The Beast conducted an interview with Sen. Elizabeth Warren (D-Mass.) and reported that she shuddered at the thought of a rate increase. In her opinion, the program, which generates billions in revenue for the government every year, is already “a tax that’s paid by middle-class kids, working-class kids, bootstrappers that are out there trying to make something of themselves” and is badly in “need of reform.”

But, home they went, our representatives in Congress. They didn’t even pay any mind to the coalition of more than 100 student body presidents, representing more than a million college students, that delivered a petition to them demanding that Congress find “a long-term solution” to the student loan crisis before July 1 and take immediate action to prevent interest rates on key government loans from doubling.

Abandoning young people and caring little, evidently, about the mounting debt they carry—now upwards of one trillion dollars, some $27,000 on average. By their inaction, our representatives are clearly willing to add to that burden.

Nice.

Let’s back up a bit. I wonder whether there could be any connection to the loss incurred—in terms of campaign support from lobbyists—when President Obama pushed, successfully, to end the cash cow of private lending (backed by public guarantees) that had Republicans (and a few Democrats) fuming?

Here is the back story: The federal student loan program, initially, was intended to inject private capital into the education lending system but, after the credit crisis in 2008, and the threat to the supply of student loans from private lenders, the federal government stepped in as a buyer of federally guaranteed loans; private capital significantly declined. The banks, though, didn’t want to lose the revenue they were receiving and fought fiercely to keep “originating” loans. On the nature of the battle and the outcome look to “Uncle Sam and Sallie Mae need to go their separate ways”, “Financing student loans: No need for a man in the middle”, and “Federal reforms in peril: Lobbyists for the loan
industry ride again.”

 

President Obama won that battle, as noted. Common sense and fiscal sanity prevailed. (Even though pushback continues; in the last presidential campaign, for example, Mitt Romney wanted to return to the private system!)

The loan reform legislation provides for all federal loans to be made directly by the government, saving billions of dollars in subsidy payments to lenders, and makes it possible to redirect the money saved, as noted above, to pay for expanded grant aid to needy students. According to the Congressional Budget Office, replacing subsidized loans made by private banks with direct government lending is likely to save between $87 and $94 billion over the next decade.

Demonstrating a distinction with a big difference, this issue deserves attention, not only on its own merits but because it draws the essential difference between the Democratic and Republican approach to policy and politics. One uses student loans as a means to aid private sector banks; the other maximizes tax dollars for students by seeing that dollars go directly to them.

We are concerned about spending, are we not? So, not to put too fine a point on it, why divert any tax dollars to private, profit-making third parties, and, for unnecessary services yet? The answer is obvious. If you’re missing it, take a look at campaign finance sources.

 

There is a second, compelling issue here as well. We are increasingly aware as a nation that we need to expand opportunities for young people to secure an education so that they can lead productive lives and so that the nation can benefit from their contributions. We need highly skilled people familiar with new technologies, for example, in order to keep pace with globalization, and, simply put, to build our economy and give it the competitive edge we know we need (and are losing). See Thomas Friedman’s “How to Score the Debates” for critical insights on the need for educational investment.

 

To sum it up, the nation needs to invest more not less dollars in student loan support. Obama has reformed the student aid program to provide dollars directly to student aid, and more of them. We need to put our dollars where the needs are–with the students. That the banks can (and will) take care of themselves is clear from any week’s headlines.

And, we need to keep the rate for borrowing within reason, meaning the capacity of students to repay their loans. It’s difficult enough as it is. Why Congress wants to make it tougher for young people to get an education is beyond me!

Oh, yes, back to where I started. The answer to Gail’s question? You guessed it: A Mississippi Bridge is now named for Stan.

Attention Congress: Get back to town and lower those rates!

Linda Stamato is co-director of the Center for Negotiation and Conflict Resolution, and a member of the graduate faculty at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. A graduate of Rutgers University and New York University, she has served as a consultant to the Ford and Rockefeller foundations and as chairman of the Board of Governors at Rutgers University.

Bob Braun’s Ledger invites thoughtful contributions like this one to its pages. Email bob@bobbraunsledger.com

 

2 comments

  1. Ken Carlson

    The latest issue of the London Review of Books has an essay entitled “Are We Having Fun Yet?” Although its primary focus is the banks in London, it details the corruption of big banks worldwide. Linda Stamato augments the charges with her account of the ripoff of college students by banks in the U.S. It seems as though there are only three groups in the U.S. today: ruthless bankers, easily-compromised politicians, and the rest of us.

  2. Linda stamato

    How disappointing to see that a vote to reinstate the 3.4 percent student-loan rate for one year was rejected by our newly-appointed U.S. Senator, Jeffrey Chiesa. Robert Mendendez, on the other hand, understands how important it is to help students–and their families– reduce the financial burden of the cost of a college education. He voted “yes.”

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