The Government’s Backward Approach on Student Loan Disbursement (Part 1)

The Federal Government is indiscriminately distributing student loans in spite of the fact that the economy is fragile and tuition costs are rocketing. Photo: GabrielaP93

MICHIGAN, April 28, 2012- For the first time in history, Americans owe more money on student loans than they do on credit cards.  At one trillion dollars and on the rise, the behemoth government takeover of the student loan industry has set into motion a new financial crisis. Indiscriminately disbursing loans with high interest rates at a time when job prospects are dismal, incomes are plummeting, tuition has skyrocketed, and college degrees are losing value is bound to shatter dreams by saddling people with toxic debt.  President Obama’s strong advocacy for a college education represents the mindset of someone either in a state of denial, or possessing a reckless optimism that the economy will soon rebound and the government will eventually profit from these student loans. 

The Student Aid and Fiscal Responsibility Act (SAFRA), a bill attached to the Affordable Care Act (a.k.a. “ObamaCare”), was signed into law by Congress on March 30, 2010.  Essentially, the legislation scraps the bank-based program, and substitutes that with a direct-lending program, where students are required to take out loans through their financial aid office that are serviced by the government.   The legislation was put into place to cut out the banker middlemen, so that the government could directly receive the “interest income” collected from the loans, thereby cutting the federal deficit. Today, 85% of all student loan debt is owed to the government. 

In 2007, President Bush signed a Democrat backed bill which cut the interest rate on subsidized loans from 6.8% to 3.4%.  Then Senator Obama, surprisingly, was one of only four Democratic Senators that failed to cast a vote on this critical loan reduction bill, yet now he is actively campaigning at colleges to renew this loan reduction, calling the rate reductions set to expire as “completely preventable”. 

Subsidized loans are need based loans, where the government pays the interest rate so long as you are enrolled in school at least part-time, and where no payment is required until 6-months after ceasing to be enrolled.  Unsubsidized loans, on the other hand, require that students be responsible for the interest that accumulates on their loans while they are still in school.  

President Obama has repeatedly reiterated that 7-million undergraduates would be affected, raising their costs by an average of $1,000 per year if the interest rate increases to 6.8% on subsidized loans.  That would indeed be an added burden.  But there is also the 6.8% fixed interest rate on unsubsidized loans, and the 7.9% fixed interest rate for PLUSloans (loans taken out to supplement aid packages) that are also crawling on the backs of borrowers.     

Because $23,000 is the maximum amount in subsidized loans that can be borrowed while working towards a bachelors, and since there is a cap on how much you can borrow based on your grade level (freshman can only borrow $3,500), it is not uncommon for college students to incur massive amounts of debt from unsubsidized and PLUSloans as well. 

This begs a fundamental question:  Why is there a laser focus on keeping interest rates low on subsidized loans, while completely ignoring the high interest rates on unsubsidized loans and PLUSloans, especially since students are responsible for interest rates that accumulate on these loans while they are in school?

Scarcity of Jobs and Lower Wages for Recent College Graduates

“At a time when the unemployment rate for Americans with at least a college degree is about half the national average, it’s never been more important,” Obama said in his weekly address last week in reference to renewing the low interest rates on subsidized loans.    

President Obama’s statement on the unemployment rate for Americans with a college degree is actually a half-truth.  According to the Bureau of Labor Statistics, the unemployment rate for those with a bachelor’s degree who are at least 25-years old is 4.1%, while the unemployment rate for those with a high school degree is 8.7%.  The unemployment rate, however, for graduates under 25-years of age tell a completely different story. 

In fact, a stunning 53% of Americans under 25-years old with a bachelor’s degree are either unemployed or underemployed. That is approximately 1.5 million bachelor’s degree holders that are either jobless or underemployed. 

Of the recent college graduates that are fortunate enough to find work, less than half are employed in jobs that actually require a college degree.  A growing number of new college graduates are working low-wage income jobs that only require a high-school education.  To put this in perspective, the median starting salary for new college graduates in 2008 was $30,000; in 2010, this tanked to $27,000. 

Sweeping floors, waiting tables, and answering phones for paychecks are now becoming the way of life for many recent college graduates.  In fact, according to an AP Report, a larger number were employed in the food service industry (in non-managerial positions) as bar tenders, waiters, etc., than were employed as engineers, physicists, chemists and mathematicians combined.

College graduates under 25, however, are not the only ones feeling the pain of the labor market.  Even when analyzing the cohort of college graduates between 25-34 years of age, the figures don’t look much rosier.  In fact, the number of people in this age range who are employed in food service, restaurants, and bars has risen 17%.  Their median income has also taken a nose dive; they now make approximately $40,000 annually, whereas in 2000 (when adjusting for inflation) they made approximately $45,000 per year.

The corporations that employ many of these new college graduates in these lower wage, lower skilled positions are only paying them slightly more than the workers they displaced-generally those with a high school education or less.  This seems to be consistent with the corporation’s main goal of maximizing profits by keeping their bottom line in check.  The problem created by this is that less educated workers are now losing jobs that were all but guaranteed for them, and college-educated workers cannot sustain themselves financially, especially with their debt burden, with such low wages. This is creating a major debacle that could further increase the income disparity among the wealthy and middle-class.    

In having to settle with menial jobs yielding low wages, the skills garnered in school go to waste, interest accrues on unpaid debt, and resume and salary histories get blotched.  This may then lead to a whirlwind of financial issues, some very damaging, like the need to file for bankruptcy or defaulting on loans.

Of all those who filed for bankruptcy in 2010, nearly14% held bachelor’s degrees, compared to just 11% in 2006.  The default rate on student loans has also soared.  According to the Department of Education, nearly 9% of the 3.6 million borrowers who entered repayment in fiscal year 2009 defaulted on their loans. 

A default on a student loan occurs when there has been no payment made on a loan for 9-months, and no arrangement for a deferment or forbearance has been made.  Once you have defaulted, the full amount of the loan is due, and collection costs are added.  The important thing to know about a default is that it is typically not discharged in bankruptcy, meaning that you will be on the hook for the full amount regardless of whether you file for bankruptcy.  The government utilizes draconian collection methods to get back what they owe; they garnish wages, seize tax refunds, and may even take some federal benefit payments (such as Social Security disability benefits).      

These statistics are very disturbing. After investing several years studying, and borrowing tens of thousands of dollars in Federal loans on education, graduates are being re-introduced to the same types of work they did part-time while in school, or even before attending college.   The concept of the “upwardly mobile” young professional is vanishing.  The difference now though is that they have the additional burden of repaying the Federal government large sums of money for many years to come.      

It’s almost like having a real bad tick that just won’t go away. 



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Michael Janati

Michael Janati is a certified personal trainer through the American Council on Exercise, and CPR/AED certified through the American Red Cross.  He has an undergraduate degree in Psychology, and a Masters of Science in Health Promotion Management.

Michael has worked as a fitness manager for a large commercial gym, and has experience training a variety of clientele.  During his employment at an outpatient day program for clients diagnosed with severe mental illnesses, he conducted fitness outings and health/wellness groups.  There, he played an integral role in helping motivate clients to become active as a means of coping with their illnesses.

Michael is competitive in races, having successfully completed a half-marathon, sprint triathlon, an indoor triathlon, as well as a number of 5Ks.  He enjoys running, swimming, tennis, strength-training, flag football, and bowling.   

Currently, he resides in Michigan, where he is working towards his Juris Doctorate.



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