Fixing the mess of student debt

One Cent's Worth
By MARC MEWSHAW  |  June 13, 2013

On July 1, the interest rate on federal Stafford student loans is slated to jump from 3.4 percent to 6.8 percent. Luckily, the forces of common sense have an ace up their sleeve. Enter Massachusetts Senator Elizabeth Warren, a Democrat, whose first freestanding piece of legislation seeks to cut student-loan interest rates to the same rock-bottom rate banks get from the Federal Reserve, thereby calling attention to the double standards around debt.

At $1.1 trillion, student debt continues to crest scary new heights, and the 37 million of us who're still paying off student loans aren't the only ones bearing the hardship. Launching an entire generation into the professional world with negative net worth exerts a drag on the economy likely to bog down the recovery for years to come.

The measure of debt to income for households under the age of 35 has mushroomed to about 1.5-to-1 in 2010 from about 1-to-1 in 2001, according to the Pew Research Center. In practice, that means Millennials are putting an ever greater share of their income toward outstanding loans instead of consumption. And that's left one of the great engines of economic prosperity — homeownership — idling, as young people failing to get traction in a weak job market put off big purchases indefinitely.

Warren's bill aims to cut off this cycle of financial disempowerment at the source. Her proposal would allow low- and middle-income students to borrow funds at the same low rates as banks do from the Fed, roughly 0.75 percent, for a year, until Congress can come up with a fair, long-term solution. As she put it in a recent statement, "If we can invest in big banks by giving them low interest rates on government loans, we certainly can do the same to help students get an education."

Among the bill's many merits, it forces us to confront an inequity hiding in plain sight. There's a puritanical strain in American thinking that frames the concept of debt in moral terms and tends to obscure its transactional nature. In reality, all loans carry a "risk premium," essentially a built-in acknowledgement that if you're an institution looking to turn profits by doing the socially useful but inherently predatory thing of lending money, there's a tradeoff: you have to accept the risk of default. Extending credit isn't a charity but an investment — and as with all investments, you're not entitled to collect every penny of principal and interest.

That message seems to have been heard loud and clear in the context of the corporate world. On the argument that excess debt hinders global competitiveness, ailing blue chips commonly declare strategic bankruptcy under Chapter 11 and write off old loans. They bounce back from these restructurings leaner — principally by shedding pensions and benefits, forcing employees to shoulder the fallout of executive ineptitude. That's to say nothing of the trillions of dollars of debt relief big banks have received through TARP, the Fed's program of buying toxic assets with taxpayer dollars.

Compare the ready availability of debt relief for corporations and banks to educational debt, which is virtually impossible to discharge in personal bankruptcy proceedings. Nor can it be refinanced — which in this low-rate environment means you'd have an easier time finding a good rate on a Porsche than a course of study in performing heart surgery.

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  Topics: The Editorial Page , Student Loans, Elizabeth Warren
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