There’s an old metaphor that compares an action to “fighting over deck chairs on the Titanic.” I love that image. It so clearly communicates the notion that an action is meant to gain an advantage that is not only trivial, but also totally ignores an imminent danger.

That is exactly how I see the current fight and resolution over the interest charged on federal student loans.

Way back in 2007, President Bush signed legislation to temporarily cut in half the interest charged on new federal student loans. The rate fell from about 7.5% to
3.8%. This reduction was supposed to last only a couple of years and then the rate was to move back to its normal level.

As with many things in Congress, once the fix was in, it proved hard to undo.

When the rate cut was set to expire this year, the world cried foul. How could Congress ever consider doubling the rate on those poor students?! The reality of the half-price sale for the last six years had turned on its head. Now it was the norm, and the actual rate of 7.5% was a usury rate.

So of course Congress caved…


It negotiated a rate a couple of percentage points above the prevailing U.S. government 10-year bond rate. The argument: There is no reason the U.S. government should earn an exorbitant profit off students.


I think there is.

Sticking with the topic of the student loan interest rate, we have to estimate the cost of the program overall. The U.S. government books all profits and losses when legislation is passed, so there is an immediate recognition of how much is expected to be lent and what repayments will be received.

The problem is that the U.S. government is most likely severely underestimating losses. It assumes a repayment rate of more than 90%. This might sound normal, but currently, on a three year run rate, more than 13% of student loans are in default. So effectively the government assumes a huge chunk of these loans will “cure,” and the future default rate will be much less.

Fat chance!

Right now, more than 43% of student loans are in some type of deferment. It could be the borrower is still in school or has applied for a deferment due to a job loss or some other hardship.

It’s the first category – borrowers still in school – that catches my attention…

Given that student loan borrowing has exploded in the last five years and now stands at more than $1 trillion, what happens when the current crop of debtors… er… graduates, hit the job market and realizes they can only find work answering phones and selling shoes?

Will $11.25 an hour actually pay enough to both live and repay the loans they racked up to get a degree in social studies?

It doesn’t seem likely. Instead, it would appear our current students are firmly tied to the bulkhead of the student loan Titanic.

But all of this brings up a much bigger and more important point.

While the fight in Congress was all about how to make student loans cheaper, not a word was said about making college cheaper. And that’s a problem.

We don’t need easier ways to finance college. We need higher education itself to go on a tuition diet.

Instead of simply cutting interest rates, how about giving lower rates on a graduated scale to students who earn entry class credits at community colleges?

How about tying financing to online learning?

If we’re serious about helping students graduate with a lighter debt burden, let’s tackle the real problem – the cost of college – instead of focusing on a side issue, the rate of interest charged on student loans.



Ahead of the Curve with Adam O’Dell

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What is the Return on Investment (ROI) of higher education, funded with student loans, if a graduate can’t find a job?

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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.