Obama College Loans: Rich Get Richer

Member Group : Lincoln Institute

Four years ago President Obama’s victory was attributed in no small part to the youth vote – both in terms of their increased turnout and the 69% of it they gave to Obama. But as the realities of the Obama economy has smacked those same voters in the face they have started to abandon him.

Which is why it is hardly surprising that the President offered a plan for student loan relief this past week – it’s a literal twofer, serving two of his favored constituencies: the education lobby and the youth vote. Ironically – given that it is billed as a populist measure – the lower and middle classes will pay it for disproportionately, especially the vast majority of blue-collar working people without a college degree. Think I am exaggerating? Let me show you how.

Let’s start with the basics of the plan. Under his proposal, the President would reduce the maximum amount of repayment per year from 15% of discretionary income to 10% and caps the maximum number of repayment years at 20, down from 25. The unpaid loan and interest balance at the end of the 20 years is forgiven, a bill paid for by the taxpayers.

So whom does this really benefit? The first, most obvious beneficiary is the educated youth vote – recent grads who ran up huge academic debts only to find that there were no jobs to match their alleged training. This group is increasingly growing frustrated with Obama, on topics ranging from the job market to, well, the job market – which is why the President is looking to help.

But does it really help the people who need it the most? Or, rather, does it simply subsidize the Ivy League and high priced national schools at the expense of the rest of the country?

Look at it this way: each student who incurs loans will have a total pool of money available to repay loans based on their discretionary income – a rough calculation of income minus $22,000, on average. This pool is constant for every wage level, regardless of the total debt run up. Therefore two students who earn the same money will have the same pool of money available to repay loans – even if one borrowed far more.

What this means is that the student who attended Bloomsburg and who graduated with $16,000 of debt and who averaged an adjusted $40,000 a year for the 20 year repayment schedule will have a pool of $36,000 over 20 years to pay back the $16,000 plus interest – more than enough to cover the full loan.

Now, let’s assume that same student had gone to Penn State and graduated with the current average of $29,000 in debt – if all other factors remain the same, that student will have over $10,000 worth of loans and interest forgiven at the end of that 20 years. Who is going to pick up that tab? The answer is obvious – the student at Bloomsburg, in the form of rising taxes.

And this is a plan that will NEED tax dollars. On its face it loses money – nationally the average student graduates with $27,000 in debt while the average college grad who can find a job makes $46,000. That means over the course of the loan the average student will have a repayment pool of roughly $48,000 to cover over $50,000 of repayment. $2000 may seem like pennies in the shadow of our $15T in national debt, but in the aggregate it is about 5% of the $1Trillion in student debt outstanding – meaning we will heap yet another $50 billion in debt on the backs of the three quarters of our population who didn’t attend college.

But even this doesn’t tell the whole story, because the "average student" is a fictional creation, which begs the question: who REALLY benefits here? The answer is the elite schools, and, as usual, it will come at the cost of the more practical and affordable schools. You see, what this effectively does is cap the total "tuition risk" of any degree from any school at a maximum number that will scare very few people; after all, 10% of your discretionary income for 20 years in exchange for an Ivy League degree in a social science is a bargain – and a questionable societal investment.

Forget the average student and her $27,000 in debt – this is a plan for the Ivy Leaguer with almost three times that much debt. Even at $75,000 a year the pool of money available to repay that loan will leave a five-figure remainder when the 20 years are up – over $10,000 on average.

That is the dirty elitist wolf the President is dressing up in a populist sheep’s clothing: the vast majority of people who actually benefit from this are students who went to high priced universities while the tab will be paid by the middle class. It is hard to see the measure as populist when you consider that blue-collar workers, the vast majority of whom never attended college, will see increased taxes to pay for yet another higher education bailout.

And make no mistake, that is the TRUE aim here; even more than it helps students at elite schools, Obama’s plan continues to shield those same schools from the economic reality that they are charging far too much for a product of diminishing quality – and utility.

By capping the cost of an education at a specific percentage over a set term of years, the plan dramatically reduces the risk to the student taking out tens of thousands in student loans. That in turn makes the prestige of a premium academic name worth it at any tuition cost – after all, if you do have to pay it all back it means you are the lucky few in the top 20% of wage earners. And we wonder why the cost of college has gone up at more than twice the rate of inflation – we have socialized the cost of the most expensive schools.

Obama’s plan extends – and deepens – that subsidy. It will allow those elite, top tier schools – admittedly, Penn State included – to keep raising tuition at a rate well over inflation without ever fearing a drop in attendance; after all, it’s a risk free deal for the students.

That is all this is — stripped of its disingenuous populist rhetoric, what Obama is offering is nothing more than a bailout of higher education funded on the backs of the middle class; the schools can keep their inflated budgets and bloated course offerings while the students can keep pouring in with little fear of the huge debt they are piling onto their future.

So, when you hear talk about "helping students out who are burdened by mountains of debt," remember that the President is bailing out a student with a master’s degree in Transgender Studies from Yale with money from a trade school graduate working like a dog to pay his mortgage and feed his family.

I’m Scott Paterno, and that is the uncomfortable truth.