Bailing out student loans

President Obama plans another kind of bailout:

In keeping with his new campaign theme of “we can’t wait,” President Obama today will roll out a plan to put more money in the pockets of some of the nation’s 36 million student loan recipients.

Obama has broad latitude in this area – certainly broader than the first two parts of his western campaign trip, underwater mortgages and subsidies for hiring veterans – because one of his early legislative initiatives was to have the federal government take over the student lending business in America.

Obama argued for the measure in 2009 as a cost-savings initiative, saying that the old system of privately issued, government secured loans reduced the amount of available money for needy students and also prevented the feds from making the system more efficient.

But Obama is now seeking to use that new power to obtain a taxpayer-financed stimulus that Congress won’t approve. The idea is to cap student loan repayment rates at 10 percent of a debtor’s income that goes above the poverty line, and then limiting the life of a loan to 20 years.

Take this example: If Suzy Creamcheese gets into George Washington University and borrows from the government the requisite $212,000 to obtain an undergraduate degree, her repayment schedule will be based on what she earns. If Suzy opts to heed the president’s call for public service, and takes a job as a city social worker earning $25,000, her payments would be limited to $1,411 a year after the $10,890 of poverty-level income is subtracted from her total exposure.

Twenty years at that rate would have taxpayers recoup only $28,220 of their $212,000 loan to Suzy.

The president will also allow student debtors to refinance and consolidate loans on more favorable terms, further decreasing the payoff for taxpayers.

via Obama Taps Taxpayers For Student Stimulus | Fox News.

The Washington Post & the student loan scandal

Last week we blogged about the student loan scandal, how some schools–especially for-profit institutions–are sucking in billions of taxpayer dollars from federal student loans, even though the majority of their students can never pay them back.  One of the biggest offenders is Kaplan, which was caught advising students to apply for loans they didn’t even qualify for.  Kaplan is owned by the Washington Post.

The newspaper has admitted that fact in its stories about the scandals.  On Sunday the ombudsman Andrew Alexander responded to reader complaints about conflicts of interest when the paper covers stories involving its corporate holdings.  Alexander thinks everything is all right as long as the paper is transparent about its financial ties.  In his defense of the paper, he let drop a remarkable detail:

But disclosure of The Post Co.’s ownership of Kaplan is especially critical because of Kaplan’s outsize importance to the overall bottom line. The Kaplan division, which offers higher education, test preparation and professional training services, accounted for 62 percent of The Post Co.’s total second-quarter revenues. Its higher education unit, the subject of government scrutiny and proposed regulations, will be in the news for months to come.

Disclosure aside, a separate issue is The Post’s commitment to following the story. “We will give Kaplan the same level of scrutiny as we give the rest of the industry,” said Emilio Garcia-Ruiz, who runs the local news staff that handles education reporting.

via Andrew Alexander – From Kaplan to Buffett, Post gets it right on transparency.

So 62% of the Post’s revenue comes from a questionable college under criminal investigation?  That would mean that 62% of the Post‘s revenue comes from the federal government?  From taxpayer money?  That is to say, cheated taxpayers and bilked students whose defaults will go with them for life?

Not only that, the lead editorial in that same Sunday edition had the effrontery to come out against the President’s plan to cut off federal aid to schools with a smaller pay-back rate of 35%.  (Kaplan’s, I was told, is something like 33%.)

Yes, the Post editorial made clear that it owns Kaplan’s.  But disclosing a conflict of interest does not mean there is no conflict of interest!  Here the editors are using the power of their opinion page to defend their own cash-cow against needed reforms.

The student loan scandal

Colleges and universities are howling at an administration proposal to cut off federal student loans to institutions unless more than 35% of their graduates pay back the loans.  That would still allow for 65% to default on what they owe!  But even this mild requirement would put a lot of for-profit colleges out of business.  Their average rate of students paying back loans is 36%.  That means that 64% of their students blow off their loans, getting a free ride from American taxpayers who are putting them through college.

But the story at not-for-profit colleges and universities is not much better. Only 54% of public college graduates are paying back their loans. At private schools the rate is 56%.

Previously, banks made these loans, which the government guaranteed. In the case of defaults, taxpayers paid them back. Under the new system, the federal government cuts out the banks and just takes the losses directly.

This costs the government–that is to say, taxpayers– billions of dollars. The total amount of student debt is now $830 billion, which is more than the accumulation of all credit card debt! And a huge percentage of that obligation is now going to be paid back, leading some to call it a new mortgage bubble about to burst.

I know it’s hard to pay back student loans. One reason is that the quality of education many of these institutions are dishing out is very, very low. The institutions–many of which are turning out to be committing out and out fraud in getting students to borrow money they can never pay back–deserve a big share of the blame, as well as the corrupt system itself.

(My own institution, Patrick Henry College, refuses to take government money, even in the form of federal student loans. We try to make up for that in other forms of financial aid, drawing on private sources. It can be a hardship, but it’s worth it.)

See this and this.