Free Markets, Free People

student loans


Sen. Democrats can’t produce a budget, but they can still find ways to raise taxes and redistribute income

The latest vote buying scheme?  If you’re a small business man who owns an S-chapter corporation (that would be me), read it and weep:

Congressional Democrats and the White House have agreed to pay for a bill to freeze student loan interest rates for a year by raising taxes on so-called S Corporations, according to a top Senate Democrat and senior House and Senate aides, but Republicans said the tax increase may ensure the bill’s defeat in the Senate.

“We’ve got it worked out,” Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa, said on Tuesday of the formula for paying for the legislation. Harkin spoke after Senate Majority Leader Harry Reid, D-Nev., said he will introduce within the next day a bill to prevent interest rates from doubling to 6.8 percent on July 1. That sets up Senate action on the bill next month after senators return May 7 from a one-week recess. A spokesman for House Minority Leader Nancy Pelosi, D-Calif., said she and House Education and Workforce ranking member George Miller, D-Calif., also signed off on the proposal.

The bill will require S Corporations with three or fewer shareholders who declare income of at least $250,000 a year to pay employment taxes, according to Harkin and Democratic staffers involved in the talks. An S Corporation is a specially structured entity that pays taxes under rules that allow earnings or losses to be passed through shareholders, reducing federal tax payments.

That’s right, S corps would be taxed to help keep interest rates on student loans down.  Remember, the government now owns student loans. 

And what have we looming right after the July 1st interest rate increase that might be hurt if that happens?

Why the November presidential election, of course.

Any wonder why the White House and Democrats are all for screwing small business to buy off a critical constituency?

It is no different in the category of desired political result than the $8 billion in spending HHS would do at the behest of the White House to slide the Medicare supplemental cost increase seniors will undergo from before the election to after.

This is outrageous.  This is blatant vote buying and income redistribution to “pay” for Obama’s re-election.  This is the essence of the Democratic ideology laid bare and the deviousness  and immorality of their methods exposed for all to see – if they’ll see it.

No one makes anyone take out a student loan.  And although it may be expensive, decades worth of those who’ve gone before have acted like adults and paid off the obligations they agreed too.

Now, if the Democrats get their way, it will be the job of those who’ve risked all to open a small business and built it with sweat equity and delayed gratification to pay to keep government controlled interest rates down?

“I don’t think anybody believes this interest rate ought to be allowed to rise,” Senate Minority Leader Mitch McConnell, R-Ky., said Tuesday. “The question is, how do you pay for it? How long do you do the extension?”

Republicans are “in the process of discussing it among ourselves,” McConnell said.

Don’t even think about it Mr. McConnell!  If, as Obama has said, it is wrong to raise taxes in an economic downturn, it is ALWAYS wrong.  And if you think we’ve turned the corner economically, you’re not paying attention.

Government decided to take over the student loan business and now government can suffer the consequences of its actions.  I have no desire or intent to bail it out.

If this doesn’t make you angry as hell then I’m fairly certain which lever you’re pulling in November. 

~McQ

Twitter: @McQandO


Higher Education–privatizing profits, socializing loss

Glenn Reynolds has an article in the Washington Examiner about how he believes the higher education bubble is about to burst.  Perhaps not imminently, but fairly soon.  Why?  Because the value of the product doesn’t match its rising cost.

Reynolds talks about the dilution of the worth of a bachelor’s degree even while the price has risen exponentially.  Something’s got to give.

But there’s no real incentive for institutions of higher learning to back off the price.  Why?  Because government has chosen to subsidize those prices by taking over the student loan business. 

Sound at all familiar? 

With no penalty for raising the price, colleges and universities continue to do so knowing full well that whatever they stick the student with that requires a loan they will get upfront.  And if the the student defaults, we, the taxpayers, get stuck with the bill.

One of the big complaints about the Wall Street bailout from both sides of the political isle had to so with “privatizing profits and socializing debt”.  That’s precisely what the current government loan program does as well.

Reynolds makes the argument that colleges and universities should be on the hook for the debt.  After all they’re the institutions providing the product.  Tying the price of the product to the worth of the product is such an old fashioned concept isn’t it?  Instead this new-fangled way of doing business has led to bubble after bubble which the uninformed then try to pin on “market failure”.

In fact it is a government takeover of a market.  There is no competition, no incentive to revisit pricing, no reason to worry about default.  Charge whatever you like, make an outrageous profit and if the loan fails, stick the taxpayers with the cost.

Nice crony capitalist system if you can arrange it, huh?

We all know exactly how it will end up … with a big “pop” and a bunch of surprised politicians asking “how could this have happened?’

And the first words out of most of their mouths?

“Market failure”.

And what does that usually mean?

More government intrusion and control.

Then the cycle repeats.

~McQ

Twitter: @McQandO


More Econ 101, more lies

Have you been following the latest gambit of our president?  It’s time to pull the youth vote back to him with some candy.  Taxpayer candy of course.   In his latest “policy” swing, he’s offering a way out of student loans to … students with loans, of course.

And of course there’s the convenient lie – you can essentially get something for next to nothing.  Go borrow money and the government will help you “satisfy” the loan after so many years if you do things like “public service”.  Oh, and it will never cost you more than 10% of your salary … so go for it.

Wait, one more thing from the Candy Man as he addressed a crowd of college students at the University of Colorado’s Denver campus:

But, he added, “young guys, I need you involved, I need you active … I need you to get the word out.”

Of course that’s code for “hey, vote for me and I’ll solve all your student loan problems”.  Cronyism at its finest and all without legislation.  Wasn’t it the Democrats who said they feared the “executive President”.  But I digress.

Here’s the basic truth:

But the colleges fees have to be paid somehow, even when repayments are stopped, said Burke. Sooner or later, this “will ultimately result in tax increases — in putting this on the backs of three-quarters of Americans who did not graduate from college.”

Working-class people will end up paying for middle-class graduates’ basket-weaving and women’s studies degrees, she said.

That’s right … these are government guaranteed loans.  So they will be paid.  The creditor doesn’t care who pays it.   The student or the taxpayer. So what Obama is more than willing to do is to buy votes today, by executive order, for taxpayer bailouts of deadbeat students tomorrow.

Obama is “shifting the burden of paying for college to all of those Americans who did not graduate from college — the waitresses, construction workers, mechanics — and that should infuriate the taxpayers who worked hard to pay off their loans, who decided to live a modest lifestyle to pay off their loans,” said Lindsey Burke, an analyst at the Heritage Foundation.

Obama’s policy is also widening the class division between working-class Americans and those with college credentials, said Matthew Denhart, a researcher at the Center for College Affordability and Productivity in Washington, D.C.

In case you were wondering, Colorado is a swing state and one in which polls show the Candy Man below 50%.

Crony Capitalism isn’t the only form of cronyism in the world as Barack Obama (and politicians of all stripes) have been proving for years.  And all funded by your money.

~McQ

Twitter: @McQandO


Is there a student loan bubble?

You might have read one of the increasingly frequent stories (like this solid essay in n+1) about a student loan bubble.  The basics:

  • College is widely believed to be the ticket to success.  Degree-holders are more likely to be employed and they make more income than non-holders.
  • Many people tried to take refuge from a lousy job market by going to college, and the recession also pinched state budgets, forcing schools to raise tuition.
  • Consequently, the amount of student loan debt has exploded toward $1 trillion, eclipsing even consumer credit.  Since student loan debt is impossible to discharge even in bankruptcy, it was widely considered safe for lenders, and was securitized much in the same fashion as mortgages.
  • As punishing as the rules for paying student loans are, those saddled with the debt have been unable to pay—many fresh graduates aren’t competitive candidates for still-scarce jobs.  Only 40% of student loans are being actively repaid.  So lenders are starting to pull out.

Over the longer term, the growth in college costs has far outpaced inflation for decades (“Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation”), while the added-income value of those degrees has not grown at nearly the same pace.  The oft-quoted statistic that college graduates make $1 million more over a lifetime is misleading (it doesn’t take into account years of foregone income, for one thing), and there’s reason to suspect that much of the real discrepancy is due to correlation: students who have what it takes to pass through the filter of college admissions and stick it out are likely the kind of people who would make more money over their lifetimes anyway.

But is that enough to call it a bubble?

First, no one can really walk away from student loan debt like they can walk away from a mortgage, so many currently nonperforming loans can be expected to perform again when employment picks up.

Second, even if many people lose faith that a college degree is worth the price, tens of millions of kids have been groomed for college from a young age, and it’s true that employers still use college degrees as a significant signal of value.

That faith is unlikely to collapse overnight, and even if it did, it would take time for businesses to adjust.  Employers would have to start signaling a greater interest in other factors that prospective employees could substitute for accredited colleges.

Even entry-level jobs have college-educated competition, so how is a young adult to invest his time and credit, other than jumping on the subsidized college bandwagon?

  • Take a risk on going unemployed for a stretch?
  • Work for free?  (He’d still have to compete with college students.)  Aside from internships, working for less than the minimum wage to establish one’s value as an employee is generally prohibited.
  • Try to convince employers that alternative forms of study are as valuable as college experience?

These are luxuries many can’t afford.  There are federal guarantees for college money, but the closest thing a young adult can get to a subsidy for entrepreneurship or job hunting is the welfare state safety net if he fails.  The college path is blazed, even if it is the scenic route.

So for now, the lack of alternatives will help ensure there’s no big “pop” but a few marginal shifts:

  • Young adults will try to attend cheaper schools, work through college, and take on less debt.
  • Creditors will be less generous with student loans while repayment rates remain low.
  • And colleges will get by on less money than they planned to have.

As much as we need greater competition in postsecondary education, and better alternatives for young adults to build and signal their value, no student loan “bubble” will do the job.  It isn’t a bubble if the air has nowhere to escape.

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