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Conservative Corner by James Soviero

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School Daze:
The Student Loan Diversion/Ruse
(April 23, 2012)

  • Politico: In 2007, then-Illinois Sen. Barack Obama missed two votes on the student loan interest bill that he now wants Congress to extend.
  • Obama twice skipped the Senate vote on the College Cost Reduction and Access Act when the bill came to the Senate floor first in July and again in September of 2007, according to public records.
  • The bill, introduced by Rep. George Miller (D-Calif.) and signed into law by President George W. Bush, first cleared the Senate in July on a 78 to 18 vote, with Obama as one of only four senators to abstain. Obama did not cast a vote again in September, after the House and Senate had ironed out different versions of the bill. He was on the conference committee assigned to merge the House and Senate versions of the bill.
  • He issued a statement when the bill was signed by President Bush, saying, "by investing in education we are restoring America's competitiveness in the world, and today is an important step forward."
  • Obama has made keeping student loan interest rates low a new priority for his administration -- but as a senator, he neither voted for Miller's bill nor signed on as a cosponsor...Keep reading...

President Obama is heading back to college this week, adding to his already unprecedented number of campus, campaign stops across the country. Mr. Obama will be scaring coeds about the coming Armageddon that awaits if student loan interest rates rise from 3.4 to 6.8%.

The borrowed money under discussion is originated under the Federal Stafford Loan Program. The rates were reduced in 2007. They are due to return to the higher number if something isn't done by July 1. Before the president, in full oratory reelection mode, leaves students and their parents in a state of panic, let's take a closer look at all this. We can start with details about the program itself and then measure how this obligation compares to a graduate's share of our National Debt.

There are two crucial points that need addressing immediately. First, the possible rate increase would only impact subsidized undergraduate Stafford loans. It would not affect unsubsidized Stafford or Plus loans. Students borrowing from banks or other private-sector lenders would not be affected. Second, this change in interest would not be retroactive. People who've borrowed at the lower number could remain "locked in" at that number. As Kathleen Pender courageously reported in the San Francisco Chronicle, "...it won't affect the vast majority of loans out there."

Stafford Subsidized Loans are federally guaranteed, based on financial need, and aimed at helping low and middle income students. Unlike other programs, interest does not accrue on the loan while the undergrad is in school, or during any deferment periods. The federal government pays the interest during these times. It's interesting to note that someone can apply for and receive the money even if they've declared bankruptcy or have late payments on credit cards. There is no qualifying check of the applicant's credit history.

President Obama and Education Secretary, Arne Duncan are heading for the microphones to declare that doubling the 3.4% would strip kids and their folks of a lot more money. Duncan recently claimed it would cost, on average, an additional $1,000. That is terribly misleading. The Secretary made it sound as if students are going to be paying a grand more every year. With these loans being paid over 10 or 20 years that kind of annual increase would be impossible.

The pay outs are amortized, much like mortgages on houses. The average amount borrowed is $9,000, while the maximum allowed is $23,000. Using those figures and some simple calculations based on amortization rates, the real difference in dollars being repaid is much less frightening.

At 6.8% the increased payment is:

  • $9,000 over 10 years-$15 more monthly, $180 yearly, $1,800 for the decade.
  • $9,000 over 20 years-$16.98 more monthly, $203.75 yearly, and $4,075 through two decades.
  • $23,000 for 10 years-$38.33 more monthly, $460 yearly, and $4,600 for the decade.
  • $23,000 for 20 years-$43.354 more monthly, $520.25 yearly and $10,405 through two decades.

We can be sure this week President Obama will be deliberately cherry picking, out of context figures (see the aforementioned $1,000), so as to send uninformed students and parents into crisis mode. He's very good at this kind of rhetoric, especially if the restlessness he manufactures diverts attention from much more serious problems he, himself helped create.

America's biggest problem is its sky rocketing National Debt. In the last three years the president's policies have tacked on another five trillion dollars to that bottom line. The total amount our nation owes will be around $16.2 trillion by this fall. College students, like all the rest of us, will have an approximate $52,000 share of that IOU. At roughly 3%, the yearly, interest only, payment on that amount is $1,560! Students sitting in on Mr. Obama's speeches should know, that unlike their student loan programs, there is no long term plan to satisfy the nation's ever growing, liability.

In the highly unlikely event the current debt and interest rates do not increase:

  • $52,000 over 10 years=$130 monthly and $15,600 for the decade.
  • $52,000 over 20 years=$130 monthly and $31,200 for two decades.

Compare these "best case" numbers with the "worst case" increases on Subsidized Stafford Loans. A student, borrowing the average $9,000 for ten years, will pay $3,200 more towards interest on our National Debt, than to paying off his entire student loan. Over 20 years, a college grad would be paying $14,700 more to the debt premium than to fully satisfying her Stafford note. And while the college loans would be absolutely discharged, the nation's overall, multi-trillion dollar tab would be reduced not one bit.

You won't see President Obama explaining any of this to his college audiences this election season. Instead he will be distracting them with talk of "everyone getting a fair shot", doing "their fair share", and playing "by the same set of rules". Meanwhile, these young men and women are having their futures crippled by unsustainable spending that, if continued, will lead to an inevitable, genuine financial catastrophe. From now until November, this frighteningly real crisis will be conveniently skipped over by Mr. Obama, in favor of his student loan ruse

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