Binding Students

The Senate’s failure to reach a deal to avoid a doubling of interest rates on federally subsidized student loans has once again thrust the magnitude of student debt into the spotlight. Most agree that an increase in the interest rate for subsidized Stafford loans from 3.4% to 6.8% is a bad idea for students, but Democrats and Republicans unsurprisingly disagree on how to stave it off. Republicans and, we should add, President Obama, want to provide a long-term fix to the recurring problem by tying interest rates to market rates. Democrats want to temporarily extend the current rate, and take up the issue again at a later date. Unable at this point to reach a passable compromise, it looks like the rate increase will go into effect July 1, as discussions have, at least for now, run aground on the July 4th recess.

That’s bad news for students, of course, though it’s unclear if they will ever actually have to pay the new rate, given the fact that Congress could after the holiday or at some later point make a retroactive fix to the problem. Although a 3.4% interest rate is certainly better than 6.8%, in the grand scheme of things it does absolutely nothing to solve the crisis of student debt. The figures are, by now, well known, though they bear repeating. The total amount of student loan debt carried by some 37 million Americans has more than quadrupled in the past decade, and currently clocks in around $1 trillion, an amount which surpasses credit card and auto loan debt. The average student loan debt for a 2011 college graduate is over $26,000, and among 25-year-olds in 2012 the average is over $20,000. Many graduate students, who are almost entirely absent from such discussions, are in much deeper. It goes without saying that lower-income students get the short end of the stick, here.

With the cost of college education continually on the rise due to numerous factors, it seems unlikely that the student debt crisis will subside anytime soon. If anything, it will only get worse. Though it doesn’t have to, so long as individual students take responsibility for their borrowing. That’s, at least, the solution often offered in the business media and among lenders. An article published on June 28 in the Business section of NBC News, for instance, notes that “the crux of the student debt crisis” may very well be that “many families don’t plan or try to calculate the total cost of attendance for a student’s college and graduate studies.” The article then goes on to quote Sallie Mae CEO Jack Remondi, who suggests that “poor planning” on the part of the borrower is to blame: “If you overborrow, whether the rate is 4 percent or 7 percent, you’re still going to encounter difficulties. A plan that takes into consideration what your income potential is going to be when you graduate and what that debt burden is going to be is critical” ( ).

Romondi’s admonition is ironic, to say the least. The nation’s largest servicer of federally-backed loans and provider of private loans, Sallie Mae’s profit margin depends on more students taking out more loans of ever-increasing value. Overborrowing, in other words, is good for business, not to mention the financial sector as a whole. Even if we forgive such blatant hypocrisy, putting the problem on individual borrowers is wrongheaded at best, since it assumes that they actually have a real choice in the matter.

At one level, we all seemingly have a choice. If the cost of a college education is too high and the potential debt too great, one can certainly opt out entirely. Or, alternatively, one can go to a less expensive school, perhaps offsetting the cost through work. The problem is that almost every article or report devoted to discussing the benefits of a college degree makes it clear that not getting a college dooms one to a lifetime lower-paid, less-satisfying, and less-stable work. The message drilled into children adolescents from all quarters is clear: if you want to succeed, you must go to college. Rightly or wrongly, the message largely holds true. For those who come from families who don’t have a large, readily available surplus of income—for most families—that means taking out substantial loans. The combination of low, stagnant wages and increasingly prohibitive tuition rates makes it virtually impossible these days to “work your way through school.”

In other words, current and potential students are in a bind. In order to succeed, they must go to college; in order to go to college, they must take out substantial loans; the loans, in turn, indebt students from the get go, hindering from the start the very success the loans promised. The problem is not “poor planning” but the system itself, which seems all but designed to force individuals to take on debt. Taking on debt, then, is not really a choice, at least in any real sense. For many it’s simply a necessity, something that one has to do in order to gain entrance to the middle class, though that’s not even guaranteed anymore. Until we address the systemic issues that bind students to loans from the very start, things will only get worse. Unfortunately, holding off an interest rate increase won’t be of much help.