Normative Narratives

Economic Outlook: U.S. Senate Fails to Pass a Bill Preventing the Doubling of Student Loan Rates

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The U.S. Senate on Thursday thwarted two rival bills aimed at stopping interest rates on millions of federal student loans doubling in less than a month.”

Student loan debt in America now surpasses $1 trillion, according to the U.S. Consumer Financial Protection Bureau, and is already hindering young people from making important economic decisions such as purchasing new homes or cars.

Last year lawmakers agreed to extend a previous rate-increase freeze on student loans for another year. Unless Congress comes to an alternative agreement, interest rates will double to 6.8 percent on July 1, adding an extra $1,000 to borrowers’ payments every year.”

“The Comprehensive Student Loan Protection Act, a bill introduced by Republican Senators Tom Coburn of Oklahoma, Richard Burr of North Carolina and Lamar Alexander of Tennessee, would have pegged the interest rates to the U.S. Treasury 10-year rate, plus 3 percentage points.

Democrats say that plan would only hurt borrowers by causing them to pay higher rates in the future as the economy recovers and interest rates climb.”

“The Democrat bill introduced by Tom Harkin of Iowa, Jack Reed of Rhode Island, and Majority Leader Harry Reid of Nevada would have frozen interest rates on subsidized Stafford student loans at their current 3.4 percent for two more years.

Democrats said their plan would protect borrowers and give lawmakers time to work on a more comprehensive, long-term solution. Republicans, such as Senate Republican leader Mitch McConnell of Kentucky say any solution should be a permanent one, rather than a “short-term political patch.”

“[Richard] Burr (Senator-R-NC) said Republicans want to provide a predictable mechanism to set interest rates for students, rather than returning to the table every year.’ Congress shouldn’t be sitting in Washington deciding with a dartboard what student loan interest rates should be,’ he said.

“President Barack Obama has also proposed a market-based plan. Under his proposal the borrowing rates would remain fixed for the life of the loan.”

Wait a minute, haven’t we seen this before? Congress creating a short-term fix and putting an “unthinkable” consequence for not passing a longer term plan within a certain time-frame? Why yes, yes we have. It is essentially the same progression as the “debt-ceiling”, the “fiscal cliff”, and the “sequester”. If we have learned one thing from recently political gridlock it’s that this tactic is ineffective—in Washington today politicians on both sides of the political spectrum are willing to let “unthinkable” events pass in order to avoid compromising (although not evenly distributed between both sides, I’ll let you guess which side I think is more reasonable).

While it is true that another month remains before rates are set to double, anyone banking on a compromise within that time is either incredibly optimistic or has not been following politics for the past half decade.

Recent statements by Senator Bob Dole on “Fox News Sunday”, highlighted in a NYT article, show that not only liberals think Tea Party Politics are hurting America:

“It seems to be almost unreal that we can’t get together on a budget or legislation,” said Mr. Dole, the former Senate majority leader and presidential candidate. “I mean, we weren’t perfect by a long shot, but at least we got our work done.”

The current Congress can’t even do that, thanks to a furiously oppositional Republican Party, and that’s what has left mainstream conservatives like Mr. Dole and Senator John McCain shaking their heads in disgust.

The difference between the current crop of Tea Party lawmakers and Mr. Dole’s generation is not simply one of ideology. While the Tea Partiers are undoubtedly more extreme, Mr. Dole spent years pushing big tax cuts, railing at regulations and blocking international treaties. His party actively courted the religious right in the 1980s and relied on racial innuendo to win elections. But when the time came to actually govern, Republicans used to set aside their grandstanding, recognize that a two-party system requires compromise and make deals to keep the government working on the people’s behalf. “

Barbara Bush, first lady to President George H W Bush, had similar thoughts in the issue of partisan divide:

“’They are going to have to compromise,’ said Barbara, the wife of former President George H.W. Bush. ‘It’s not a dirty word.’”

This position is unsurprising considering her husbands political history. “To reach agreement with Democrats who controlled both the House and the Senate, [H W] Bush accepted a deficit-reduction plan that raised income-tax rates—breaking his “read my lips” tax pledge from the 1988 presidential campaign. In protest, Newt Gingrich, then the House minority whip, quit the talks and led a rebellion that ultimately persuaded nearly half of Republicans in the chamber to abandon Bush and oppose the deal.

Bush’s budget package established the foundation for further deficit reduction under President Clinton in 1993 and 1997. Those agreements fueled the 1990s economic boom and produced three consecutive balanced budgets in Clinton’s second term. But it was Gingrich’s revolt in the name of inviolate principle, not the elder Bush’s flexibility in the face of divided government, that left a lasting imprint on the GOP.”

Economic advisor to Presidents H W Bush and Reagan, Bruce Bartlett, is an Economix blogger for the NYT, and a prominent example of a conservative turned liberal due to the G.O.P’s philosophy on political economy.

Tea Bagger’s cannot claim core Republican values from some “Golden Age” in the 1980s and 90s, because the very people who were running the G.O.P. back then have renounced the Tea Bag movement:

“I’m not all that interested in the way things have always been done around here,” Senator Marco Rubio of Florida told The Times last week.

I hate to beat a dead horse (elephant?), but if you look at congressional approval ratings over time, perhaps it would make more sense to defer to the more experienced and knowledgeable politicians who once ran your party.

A primary function of the legislative branch, known as “vertical accountability”, is to represent citizen’s voice in government agenda-setting and policy making processes. With only 16% satisfaction, can there be any question that partisan politics have prevented legislators from doing their jobs?

Many countries have mechanism for a disillusion of parliament, based on differing criteria. Perhaps the time has come to consider a Constitutional amendment stipulating instances in which either the House and / or Senate can be dissolved due to incompetence.

It is not too far ahead to look forward to the 2014 midterm elections. These elections represent a major turning point in U.S. political history. An absolute majority for the democrats will further embolden the mandate Obama believes his re-election signified—a more progressive, meritocratic, and egalitarian vision of America. If democrats fail to seize this opportunity, we can expect two more years or relative government inaction leading up to the 2016 elections.

Back on subject, I believe that Obama’s plan is a reasonable compromise between the two sides. I agree with Senate Republican leader Mitch McConnell that short-term patchwork policies are no way to treat any legislation, particularly one with such long-term implications as student loan repayment. But I also agree with general democratic opposition to tie rates to market values, as the volatility in U.S. bond markets does not offer much security to potential student-loan candidates.

The Obama plan is good because while the current market sets the rate, there is the stability of having that rate locked in place. When the economy is doing well, and there is low unemployment, rates will be higher; signaling that a prospective student may be better served joining the labor force. When there is a lack of jobs, and the opportunity cost of attending college is lower, this will be reinforced by lower borrowing rates (as we see now).

Of course the ultimate factor of how much student debt one accumulates is the cost of their institution. Public state, city, and community colleges offer an affordable alternative that leaves students with much less debt, which mitigates the effect of changes in student loan rates in general (as opposed to someone who takes on more debt at a private college).

Needs-based grants are often available to students who show academic promise but cannot afford to attend schools. Changing affirmative action to a more needs-based socio-economic program, instead of a race-based program, could make the program work as it was originally intended, which was to help disenfranchised Americans realize the “American Dream” of social mobility.

One criticism of this policy is that it is somewhat deterministic, in that at times when T-bill rates are high, many students who would benefit from going to college may decide they cannot afford it.

The opposition to the Obama plan is that by fixing rates at a certain level for the life of the loan, the U.S. government may be on the hook for a large subsidy when T-bill rates go up. Let’s say I lock in a loan at 2%, and the government now has to pay 8% interest to borrow money, the government is taking a large loss there.

But that is the government’s job, to provide financing for important programs. Schooling should be subsidized for all the benefits it produces. Senator Burr is correct, the U.S. government should not unilaterally set rates. It should, however, provide Students with the security of knowing at what rate they will have to pay back student loans, given the long-term benefits that education gives and the financial uncertainty facing 99.99% of Americans (basically anyone who cannot fall back on family wealthy).

Subsidizing student loans, changing affirmative action to a needs based program, and making available cheaper public education alternatives, is three-sided approach that can drastically increase social mobility in America.

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One thought on “Economic Outlook: U.S. Senate Fails to Pass a Bill Preventing the Doubling of Student Loan Rates

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