George Carlin would have had a field day with the student loan pricing circus currently on display in Congress. To paraphrase one of his epic rants, they care about you while you’re in college, but after you graduate you’re on your own.
A perfect example is the most recently announced bipartisan student loan deal in the Senate. It proposes to peg — truly the operative word in this case — student loan rates to the 10-year Treasury note, plus surcharges of 2.05% to 4.6% for the various loan programs, with lifetime interest rate caps that range from 8.25% to 10.25%. This despite the fact that the borrowing the government undertakes to fund these loans is benchmarked against Treasuries that are shorter than one year in duration.
To give you a better sense for how significant that disparity is and its implications for student borrowers, at the time of this writing, the difference between the 3-month and 10-year Treasuries was 2.44%, which increases to 4.49% for student loans after the 2.05% surcharge is added. The way the math works, that spread translates into a 24.3% present value profit — $24.30 for every $100 of undergraduate loans the government finances under this scenario if fully implemented today.
The Profits Behind the Student Loan Deal
That’s $24.3 billion for every $100 billion in student loans; $243 billion if all $1.1 trillion of education debt were financed this way. And for what? To cover administrative costs? Surely not, especially when you consider that Sallie Mae — the largest student lender in the country — is able to squeeze out a profit from just a 0.2% interest rate add-on.
So where’s all that money going?
The profits from this bipartisan student loan “deal” would be used to offset the deficit. In other words, as far as Congress is concerned, higher education represents an economic opportunity more than it does the realization of an American Dream ideal.
But what if Carlin was wrong about the folks in D.C.? What if they really did care about our kids’ longer-term health and welfare?
They would have the courage to right the myriad wrongs in this broken system by addressing each aspect of the problem. That means creating a student loan deal that tackles not only new student loans, but existing loans and the cost of higher education as a whole. For example:
How Congress Should Deal With New Loans
- Pricing would be linked to comparable-duration government borrowing. If the government borrows one-year money to fund 10-year loans, the students should be charged on that basis. It’s called match funding, and it represents the fairest way to price a loan.
- The math behind the administrative surcharges would be fully disclosed.
- Repayment terms would be extended to 20 years, and borrowers would continue to have the ability to accelerate the repayment of their debts at any time without penalty.
- Student borrowing would be capped at the average first-year salary levels for recent college graduates, as reported by the National Association of Colleges and Employers. That, coupled with a longer loan duration, would ensure the average borrower’s ability to live within his or her post-college means (because the repayments should consume less than 10% of pretax income).
How Congress Should Deal With Existing Loans
- The government’s relief programs would be expanded to include all student loans without regard for origination channel (public, private or public-private hybrid) and payment status (current vs. past due) so that no borrowers are left behind as a result.
- Subcontracted loan-servicing companies would be held accountable for preventing delinquencies in the first place instead of being rewarded for curing the defaults that could have been averted.
- The bankruptcy code would be revised to permit the discharge of all privately owned education debt — including Federal Family Education Loan Program loans that were originated by the private lenders — because there’s no surer way to encourage good faith negotiations between lenders and borrowers than when the lender knows its uncollateralized borrower has the ability to pull the plug.
- The tax code would be revised to exempt student debts that have been forgiven just as it was for mortgages immediately following the economic collapse.
- The credit bureaus would be directed to expunge consumer payment histories for student loans once they’ve been modified because there’s more than enough blame to go around for this mess.
How Congress Should Deal With Rising Education Costs
- The combination of all these measures will have a dampening effect on institutional cash flow because fewer students will be able to afford today’s tuition prices. Congress would help the colleges adapt to the new reality by offering incentives for sector consolidations to drive out the wasteful redundancies that currently exist.
- Congress would also provide incentives to help the colleges transform the values of their sideline businesses (housing, food services and entertainment) into much-needed investment capital for upgraded educational content and its delivery.
I’m hoping Carlin’s rant — which was inspired by a different cause years ago — will resonate with the incrementalists who seem to believe they’re on the verge of solving the student loan problem.
This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.