Saturday, April 28, 2012

Obama's College Loan Interest Strategy

This past week, Obama, the President, was on on road visiting college campuses as a Presidential candidate. He was trying to relive part of his successful 2008 run to the White House by appealing to the youngest voters.

As strategy would have it, back in 2007, the Pelosi Congress cut the interest rate on student loans down to 3.4%. The political kicker was that in the middle of the 2012 campaign, the rate would double. It would, like most government subsidies, become a "they said / we said" discussion that would appeal to the less-than-informed.

Listening to the President, he made it sound like that if Congress did nothing, on 1 July, all outstanding student loans would go up to the new rate. He did not state that it would be for all new government-backed loans. A politician should never miss an opportunity to mislead his constituency.

The problem with most government programs is that they pick winners and losers, at the taxpayer's expense. They could subsidize hamburgers and drive up the demand for hamburgers. Eventually the hamburger subsidy will end and hamburger joints will go out of business. Same thing with government-back student loans. 3.4%, barely above the 3.1% rate the Treasury is paying on the 30-year bond, is a great deal for the individual student but not for the taxpayer.

The problem with student loans, regardless of the interest rate, is students need to re-pay them. With poor job prospects and most starting incomes at rates that fail to enable normal life, the loan default rate is increasing. With the government being the main lender, it will be the taxpayers that will cover the defaults. It is very similar to the housing debacle.

Obama's rhetoric is just that. The problem is that his policies fail to incentivize a critical mass of entrepreneurs and business risk-takers to move the economy forward. You can't "Huey Long" the federal government, despite his best attempts.


Payday Loan said...

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