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George Carlin would have had a field day with the student loan pricing circus currently on display in Congress. To paraphrase one of his epic rants, they care about you while you’re in college, but after you graduate you’re on your own.
A perfect example is the most recently announced bipartisan student loan deal in the Senate. It proposes to peg — truly the operative word in this case — student loan rates to the 10-year Treasury note, plus surcharges of 2.05% to 4.6% for the various loan programs, with lifetime interest rate caps that range from 8.25% to 10.25%. This despite the fact that the borrowing the government undertakes to fund these loans is benchmarked against Treasuries that are shorter than one year in duration.
To give you a better sense for how significant that disparity is and its implications for student borrowers, at the time of this writing, the difference between the 3-month and 10-year Treasuries was 2.44%, which increases to 4.49% for student loans after the 2.05% surcharge is added. The way the math works, that spread translates into a 24.3% present value profit — $24.30 for every $100 of undergraduate loans the government finances under this scenario if fully implemented today.
That’s $24.3 billion for every $100 billion in student loans; $243 billion if all $1.1 trillion of education debt were financed this way. And for what? To cover administrative costs? Surely not, especially when you consider that Sallie Mae — the largest student lender in the country — is able to squeeze out a profit from just a 0.2% interest rate add-on.
So where’s all that money going?
The profits from this bipartisan student loan “deal” would be used to offset the deficit. In other words, as far as Congress is concerned, higher education represents an economic opportunity more than it does the realization of an American Dream ideal.
But what if Carlin was wrong about the folks in D.C.? What if they really did care about our kids’ longer-term health and welfare?
They would have the courage to right the myriad wrongs in this broken system by addressing each aspect of the problem. That means creating a student loan deal that tackles not only new student loans, but existing loans and the cost of higher education as a whole. For example:
I’m hoping Carlin’s rant — which was inspired by a different cause years ago — will resonate with the incrementalists who seem to believe they’re on the verge of solving the student loan problem.
They’re not.
This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.
Image: Hemera
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