May 4, 2012

The Media On Student Loans

Patrick Laverty

We have a debate going on in Congress about raising the rate on student loans from the current 3.4% to the old interest rate of 6.8%. There is very little coincidence that the Democrat-controlled Congress who passed this change set the expiration date for an election year. Either continue with the Democrat chosen rate or deal with the consequences in November.

However, my issue here is with the media. I've read so many sources about this situation and many of the writers aren't telling the full story. I don't want to pick on the Warwick Beacon because I've seen the same sort of thing in many different news sources, but this is just the one that I'm using for illustration.

For some Americans, increasing an interest rate by 3.4 percent may not be a cause for alarm. For Cranston native Andrew Iasimone, however, who has incurred $32,000 in student loans in his freshman year at Roger Williams University, this could be a big problem. Iasimone still has five years to go in his pursuit of a double major in political science and psychology with a concentration in forensic science.

Paying back his loans may become even more difficult this summer should Congress increase the interest rates for the Stafford Student Loan from 3.4 to 6.8 percent. If that is the case, students like Iasimone may be looking to pay an additional $4,000 to $5,000 more in interest costs, according to Charles Kelley, executive director of the Rhode Island Student Loan Authority.

Later in the article, Mr. Kelley states:

An increase in the interest rate would affect 36,000 Rhode Islanders with Stafford loans amounting to a total of $150 million, said Kelley.
To me, that's either simply untrue or really misleading. Let me ask you this, based on what you read there, if you had a pile of student loan debt and Congress changes the interest rate to 6.8%, would you think your payments are going to go up? Of course you would! Not so fast.
The increase would only affect interest rates for subsidized Stafford loans for undergrad students issued after July 1, 2012. Interest rates for existing loans won't change.
Any Stafford loans originated before July 1 of this year, will keep the old interest rate. So your pile of debt is unaffected by this change. If Congress raises the rate to 6.8%, then don't use the Stafford program, go to a bank and get a lower rate.

Additionally, the Beacon article mentioned this one student's $32,000 in loans for his first year, however this rate change will only directly affect federal Stafford loans and not all of that $32,000 is Stafford. We know this because again from the USA Today article:

That estimate is based on a borrower with $23,000 in subsidized Stafford loans, the maximum allowed for undergraduate dependent students.
That's one of my big frustrations with the media today. You try to be informed and you read the news but often they struggle to get the whole story out.

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And what is driving up the cost of higher education in the first place? Cheap, essentially unlimited credit from the Federal Government.

As cheap credit is made available to consumers, service providers will raise their prices to carve out the consumer surplus. Simple economics.

Posted by: Dan at May 4, 2012 1:07 PM

Good post Patrick.

Posted by: Don Botts at May 4, 2012 3:39 PM

Has anyone thought of making student loans dischargeable in Bankruptcy again?

"a double major in political science and psychology with a concentration in forensic science."

If the loans were dischargeable, maybe the lenders would say "we don't make loans to potential "profilers"". Really, what are you going to do with a degree like that?

What are people going to do with degrees in "Womens Studies", "Black Studies". etc. Really, just run away from a degree that ends in "studies".

Posted by: Warrington Faust at May 4, 2012 8:07 PM

Posted by Dan
"As cheap credit is made available to consumers, service providers will raise their prices to carve out the consumer surplus. Simple economics."

"That which you subsidize, increases, regardless of intent of the subsidy" - Unknown NPR presenter

Regardless of availability, actual education received will vary with the individual. But, the tuition will surely increase.

I wish there was a way to quantify "life long learning". I recently ran into a guy who was the "wrench" at my local garage. He wanted to discuss the Plantagenet succession. I couldn't have been more amazed if he had begun discussing precession and Foucault's pendulum.

Posted by: Warrington Faust at May 4, 2012 9:45 PM

Michael Crichton coined a term related to this called the Murray Gell-Mann Amnesia effect. Murray Gell-Mann (nobel prize physicist) realized that every single news article that talked about physics had something major wrong with it. In many cases, the wrtiter got it backwards. He then realized that, while reading articles on other topics that he was not so familiar with, they could be screwed up just as badly.

I see these screw-ups in education reporting all of the time and wonder why the discussion can't be at a much higher and more informed level. I place much of the blame on journalists. Their job is not to understand, but to write an article. They line up "experts" on both sides of an issue without any understanding or evaluation of their qualifications. I've had email exchanges with the supposedly better informed ProJo education writers and they still don't understand the issues; they just refer to their same old resource list to get the same quotes from the usual suspects.

My first reaction to this article was not the interest rate, but why on earth does this guy have $32K in loans after only one year? And, he has "five years to go in his pursuit of a double major in political science and psychology with a concentration in forensic science." Has he checked job opportunities, or has he just read a bunch of news articles on how, of course, college degrees will pay off in the long run. My niece and her boyfriend are waiting tables and still paying off college loans from good colleges. They are in their late twenties. What happened to all of the critical thinking and problem solving skills that educators talk about?

Posted by: SteveH at May 7, 2012 10:27 AM

SteveH, I commend "A Mathematician Reads the Newspaper". As expected he finds much which is wrong, and much which is impossible.

As to your other point. I have been quoted as a "expert" three times in the WSJ, I know somebody.

Posted by: Warrington Faust at May 7, 2012 3:22 PM

Warrington,you mean the guy at the garage didn't get around to the Albigensian heresy ? lol

My husband got staight A's in college calculus. He also also had 6 1/2 years of highly responsible military technical experience. He didn't finish a degree so he wound up with poorly paid positions with no hope of advancement.

At one time,he was working as a low wage temp worker under a supervisor who was struggling with basic algebra at CCRI. He used to help the guy with his homework. Of course,the company didn't hire my husband. That would have made too much sense.

Posted by: helen at May 8, 2012 1:11 AM

When I saw the person's double major and concentration I thought maybe a career in propaganda?

Posted by: helen at May 8, 2012 1:20 AM

posted by Helen:

"Warrington,you mean the guy at the garage didn't get around to the Albigensian heresy ? lol"

That's it, that's it, he is a Cathar.

Posted by: Warrington Faust at May 8, 2012 9:47 PM
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