News Flash to Obama On Student Loans: It Is Not The Interest Rates…It Is The Sticker Price

I asked Alan Collinge for a follow-up to explain more thoroughly why he thinks President Obama’s focus on the interest rate on Stafford loans is a distraction from more substantive issues. Here is what he has to say.

I have been impressed with the authenticity of President Obama to this point.  On most issues he convinces me that he is both knowledgeable, and concerned. One would assume that his own personal history would inspire wisdom and passion about the student loans, the  critical issues, and so forth.  Listening to his recent stump speeches oninterest rates for student loans, however, indicates that he clearly does not get it.

First of all, the current legislation that is sucking all of the air out of the room is just not very impressive, because it is not the interest rates that are compelling citizens to take up residence in public spaces across the country- it is the sticker price on colleges, and the predatory foundations of the lending system that stand behind them.

Secondly, the legislation in question only affects a small portion of loans, namely, undergraduate, subsidized Stafford loans.  Moreover, thecurrent interest rate is 3.4%, and keeping this fixed as opposed to allowing it to double to 6.8% really does not impact the borrower’s bottom line very much. Most importantly, this legislation does absolutely nothing to control the (nearly) hyperinflation that has gripped academia for years and decades.  This is not to say this is unneeded legislation.  It is needed.  But if President Obama thinks that he can phone this one in, and be done with thestudent loan issue for a while, he had better think again.

The way to affect college pricing meaningfully is to freeze, or even lower the federal lending limits on federal student loans.  This will not happen until the Federal government has skin in the game on the side of students, instead of against them, due to the absence of bankruptcy protections.  I have written many times in this column and others about the fact that the Department of Education has actually been making, not losing money on defaulted student loans for years.  This is the reason why government oversight and loan administration is so bad, and why prices and default rates are so high.

I was happy to see that Anya Kamenetz wrote an article earlier today for CNN  about the need to restore bankruptcy protections to all student loans.  In her piece, she briefly mentions a “ripple effect” that will cause many problems to be solved.  This is spot on and I could not agree more.  With the Department of Education working at long last FOR the interests of the citizens instead of against them, we should see all manner of creative and effective repayment plans, oversight procedures, and the like to keep the cost of college low, and the quality high.  This will only happen in the presence of full and fair bankruptcy protections, and will absolutely not happen in their absence.

I do hope that the American people have the sophistication to read past the headlines, and wrap their heads around the real problem with student loans, and find a way to stand up and fight for bankruptcy protections, and be proud to do so.  It is an unlikely position to find one’s self in I know, but it’s a fight that absolutely needs to be fought, and will pay off in spades.

Alan Collinge is the founder of StudentLoanJustice.org.

You can follow me on twitter @peterreillycpa.