BRATTLEBORO — How to Stall an Economy 101?
Have a population where many of the breadwinners send what could be disposable income to pay debts like student loans.
Congressman Peter Welch, D-Vt., announced Monday that he and more than 100 members of the U.S. House of Representatives have launched efforts to block the scheduled doubling of Federal Direct Stafford Student Loan interest rates.
Welch estimates that the increase could tack another $11,000 onto 20-year repayment costs for some Vermont college students who have borrowed the maximum amount.
According to a press release issued by the Congressman's office, Welch is pushing for passage of H.R. 3826 to extend the current 3.4-percent interest rate on Stafford loans.
Without the legislative intervention, the interest rate will automatically double to 6.8 percent on July 1 if the 2007 legislation that reduced the rate is allowed to expire.
“This is a real threat to middle-class families already struggling to send their kids to college,” Welch said in a press release. “Affordable loans are essential to families who are piecing together the resources to pay tuition and fees.”
“Interest rates are at an all-time low,” he continued. “It simply defies logic that rates could double and push a college education even further out of reach for working families.”
According to the Vermont Student Assistance Corp. (VSAC), subsidized Stafford loans are for individuals meeting criteria for financial need. The government pays the interest on these loans while the student is in school and for a six-month grace period following graduation.
The rate for unsubsidized Stafford loans has been and will stay at 6.8 percent. The interest on these loans starts accruing when the loan is made, said VSAC.
The Stafford loans have annual and cumulative limits so most students take out a combination of “sub” (subsidized), and “unsub” (unsubsidized), VSAC noted.
According to VSAC, undergraduates, both dependent and independent, can borrow a maximum of $23,000 in subsidized Stafford loans.
Dependent undergrads can borrow a maximum of $31,000 and independent undergrads can borrow a maximum of $57,500 in combined subsidized and unsubsidized Stafford loans.
Typically, Stafford loans have a 10-year repayment period, which borrowers can extend to 20 years. Over 10 years, the interest on the maximum subsidized Stafford loan payback amount more than doubles, given the 6.8-percent interest rate.
At 3.4 percent interest, repayment of a principal of $23,000, plus interest of $4,149, brings the total cost of the loan to $27,149. At 6.8-percent interest, a principal of $23,000, plus interest of $8,746, brings the cost to $31,746.
According to Welch, student-loan debt in the U.S. is nearing $1 trillion and now surpasses debt held on credit cards and auto loans.
In Vermont, almost 70 percent of college graduates hold student loan debt.
The average debt per Vermont student is $28,391, according to The Institute for College Access and Success' project on student debt, making the state's college graduates the sixth most heavily indebted in the nation.
A financial albatross
In a separate interview, Welch said that student debt equals bad news for graduates and the country's economy.
He described student debt as “a financial albatross” dragging on the necks of recent graduates, who start their post-college lives behind the financial eight-ball.
The economy suffers as well, because people making high monthly payments on student loans have less money to spend on eating out, car loans, rent, clothes, or entertainment.
“It's just a fairness question,” Welch said adding that Americans should be able to expect a decent education without a heavy debt burden.
On the national level, the conversation against student loans has turned almost ideological.
In an interview on on G. Gordon Liddy's radio show, Congresswoman Virginia Foxx, R-N.C., said, “I have very little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt because there's no reason for that.”
“We live in an opportunity society and people are forgetting that,” said Foxx, who chairs the House Subcommittee on Higher Education. “I remind folks all the time that the Declaration of Independence says 'life, liberty, and the pursuit of happiness.' You don't have it dumped in your lap.”
“Dysfunctional ideology on top-line budget numbers is getting in the way of making smart decisions about the future,” Welch said.
Welch called the conversation about the interest rates an example of the “brinkmanship” trend that takes necessary decisions, like renewing the federal budget, right up to the deadline.
Know before you go
The College Cost Reduction and Access Act, passed in 2007, lowered the interest rate on subsidized Stafford Loans from 6.8 percent to 3.8 percent beginning in 2008, explained Don Vickers, president and CEO of the Vermont Student Assistance Corp. (VSAC).
Founded in 1965, the public nonprofit agency provides assistance to high school students seeking further education by providing financial information, grants, loans, and scholarships. VSAC also provides career and education planning, including grants for adults who want to use education to enhance or change their skills.
The 2007 law expires July 1.
Right now, the federal government is borrowing money for the student loans it awards at about 2 percent. But, said Vickers, that rate can vary, which creates an investment risk. The government covers this risk by charging a higher interest rate to borrowers.
According to Vickers, the federal government is projected to make about $39 billion off student loan interest in the coming year.
“[The feds] are making a lot of money off student loans,” he said.
Right now, student loan holders pay higher interest rates than most new mortgage borrowers, yet the government encourages people to seek a college education, he said.
In Vickers' opinion, another issue for young people taking loans is that they're betting on stepping into high-paying jobs after graduation. Given the realities of a sluggish economy still trying to recover from the 2007-08 collapse of the financial markets, the good wages may or may not materialize. Still, the loan requires repayment.
Student-loan debt affects Vermont by contributing, in part, to the shrinking 25-to-35-year-old demographic.
If young people need to pay off loans and they can't find jobs in Vermont that let them meet their financial burden, they will move out of state.
“The jobs aren't here,” he said.
One way VSAC has tried to combat increasing student-loan debt is to teach students how to better evaluate and prepare for college expenses.
Most families find the college first and then figure out how to pay for it, said Vickers. VSAC would like to see more potential students sitting down with their families and figuring out what they can afford and the level of debt, if any, that they are willing to incur before deciding on the school.
Personal cruelty
Richard D. Wolff, a professor, economist, and author of Occupy the Economy: Challenging Capitalism, classifies student debt as “immense personal cruelty” toward the graduates, the country's future work force.
That debt represents a piece of a larger ailing system, Wolff believes.
In Wolff's opinion, the cruelty comes wrapped in the post-credit-crisis' empty promise that a good education delivers a good-paying job that will offset the loans.
Wolff said many of the recent graduates carrying high debts in a poor economy with low-paying jobs won't be able to pay the loans off. Ever.
“Or at least not without eating cat food for years,” he said.
Wolff is a professor emeritus of economics at the University of Massachusetts, Amherst, where he taught economics from 1973 to 2008. He is also a visiting professor in the graduate program in international affairs of the New School in New York City. He also teaches classes regularly at the Brecht Forum in Manhattan.
He has been a vocal critic of the economic policies of the Obama administration and what he calls the “fundamental absurdity” of an economic and political system spun out of control.
“Nothing is more self-destructive than handling the economic crisis by shooting ourselves in the foot,” he said in a phone interview on Monday.
The nation is thinning the pool of people able to afford education by lowering the amount of support per student, he said. Belt-tightening, he added, might solve a short-term crisis but will contribute to a long-term problem.
Quality education, whether at a four-year university or technical college, builds workers' skills, he said, and in turn, a trained work force helps the country compete globally.
Unemployed young people get the idea that a technical school or college will give them the credentials to move up economically. But in a world of ever-rising tuition costs and ever-shrinking personal resources, debt is the only option but one that might prove worth the gamble.
“Normally this calculation works,” said Wolff.
Unfortunately, the 2012 American economy no longer qualifies as normal in Wolff's estimation.
According to Wolff, the government bailouts that followed the economic crisis, now in its fifth year, economically “blew up” 80 percent of the population.
Five years later, this 80 percent is “freaked.”
“This is nuts,” said Wolff. “This is not how a reasonable society solves problems.”
The lifelong professor said he knows students who say they can't pay back their loans and probably won't. He presumes they mean that the number of defaulted loans will reach a tipping point beyond what is politically feasible for the government to prosecute.
The professor remembers a conversation with a fellow professor at the University of Paris. Although the two men earned about the same salary, the French professor maintained a higher quality of life because of programs like government-subsidized child care, which cost the new father about $17 a week.
Wolff remembers the French professor adding, “Of course, we have free college,” accompanied by a look of surprise. The professor told Wolff that state-subsidized education helped ensure France's future and prosperity.
Wolff said that using student loans to pay for school represents a relatively new phenomenon in American history.
According to Wolff, before World War II, people who attended college had the means to afford college. If a student took out a loan, the amount remained small compared to the cost of school and usually came with a campus job that helped pay the debt.
After World War II, the government enacted the G.I. Bill, which paid for service members to attend college.
The G.I. Bill helped fuel a demand for higher education that the private colleges couldn't meet, and this demand eventually led to the expansion of state college systems.
State colleges and universities expanded further in the 1960s, as the first wave of Baby Boomers went to school. Back then, many states subsidized higher education with low tuition rates for residents.
According to Wolff, the idea was to move toward the European model of free education for all.
Now, the country's social policy has taken “a gigantic step backwards” by essentially blocking people from higher education, because of fears of debt and unfavorable job prospects.
“This is not the way to organize education in a county as rich as the United States,” he said.
In 2011, said Wolff, student debt surpassed credit-card debt for the first time, and he thinks the country is still figuring out the downside of this situation.
Although Wolff feels enumerating the direct and indirect consequences of student debt is an impossible task, he said that limiting earners' personal economic growth has costs for all of society.
When recent college graduates can move out of their parents' homes, that helps increase demand in the housing market.
Economics also compels students to choose college courses based on the careers they think will pay rather than their passions, thus shaping future college curriculum and job qualifications.
Economics also influences people in choosing to further their education. Economics also plays a hand in unemployment, where nest eggs dwindle and debt burden rises.
According to government figures, the long-term unemployment rate remains at the highest level since the end of World War II. Some 25 million Americans are either unemployed, have given up looking for work, or have a part-time job when they really need to work full-time, said Wolff.
Meanwhile, he estimates that about 2 to 5 percent of Americans are sitting on greater wealth than the rest of the country combined, and Americans have apparently grown comfortable with an economy that “gives to those who need it the least,” while depriving the masses.
“This is lunacy,” he said.
According to Wolff, about 1 percent of the population earns about 21 percent of the country's income. The other 99 percent feels the pinch of living on the remaining 79 percent of the income.
America likes to identify itself as a country of the middle class that keeps climbing the economic ladder, said Wolff.
“You can't punch them [Americans] in the face with the opposite of what they're expecting,” he said.
Wolff feels that movements like the Tea Party and Occupy signal the growing discontent in America.
In his opinion, putting the economic squeeze on students equates to a “social policy heading right into a stone wall.”
He laughs, saying that governments should know better than to upset the social force known as young people, who have traditionally led almost every social movement since the 1960s.
Wolff predicted that a young woman, one of his advisees, will eventually ask him what career path she should take. The student wants to become an economics journalist but fears the ratio of high debt to low paycheck, he said.
No one can predict the best career strategy, said Wolff, who vowed to speak honestly to his student and tell her to choose her passion over the unpredictable security of the “good-paying job.”
“If journalism is what you love, do it,” he planned to say. “At least [if things go south], you'll have a skill you enjoy.”
During the Great Depression of the 1930s, Wolff said, President Franklin D. Roosevelt created the New Deal to provide government relief programs, such as unemployment insurance and public works projects, to aid the millions who could not find work.
Today, however, the federal government has turned 180 degrees, Wolff said.
“[It's] refusing to help the masses of people, and we'll be paying a bitter, bitter, price,” he said.