The Biggest Sweeping Overhaul of the Student Loan Industry Could Help Your Bottom Line
Most of you know that I'm not a big fan of a lot of the programs put in place by the United States government. Ordinarily, bureaucracies outlive their purpose and are never adjusted to reflect new economic realities. As Peter Drucker pointed out years ago, the agriculture department is now larger than it was when our entire gross domestic product was agriculture-based despite now being only a few percentage points of our national production. That makes absolutely no sense whatsoever. Most in Washington, D.C. don't care because compared to defense spending, interest on the national debt, Social Security, and Medicare, all other spending is a drop in the ocean. Those four items are the only thing that matter, frankly, and without doing something about them, the country cannot solve its budget deficits.
Fortunately, today is one of the days that I can tell you the Federal government is actually doing something that is 1. good for the taxpayer, 2. good for the civilization and our economy, and 3. good for individuals in the middle class and poverty line. It's shocking, actually, given the level of foolishness coming out of the capitol lately, but lawmakers and the President deserve props on the student loan reform. But, I actually think those who take the time to read the student loan reform bill themselves are going to be pleasantly surprised. The government is actually running itself like (prepare to be shocked) ... a business!
As an investor, the student loan reform could result in far more money in your pocket if you are planning on going to school yourself or helping your child(ren) obtain a college degree.
How the Student Loan Reform Works
The Short Version: The Federal government is pulling a Wal-Mart.
The Slightly Longer Version: A substantial portion of all student loans are backed by the Federal government. In fact, modern education would not be possible without it thanks to the post-World War II programs that resulted in a better educated work force. These student loans fall under several programs such as Stafford loans and Perkins loans. In the current student loan system, instead of lending money directly, the government allows a bank, such as Citibank, to make the student loan and the government guarantees that it will repay the principal if the student defaulted. Citibank gets fees, interest, and a guaranteed profit for doing very, very little all thanks to the backing of taxpayers' money.
Now, the Federal government is going to cut out the middle man just like Sam Walton did when he went straight to the manufacturer, demanded the best price possible, and passed the savings on to all Wal-Mart customers.
Instead of letting Citibank keep the profit on the student loans, the taxpayer (who is the one taking the risk) now gets the reward, as well. The Federal government will lend directly to students, the debts cannot be discharged in most bankruptcy cases, and the savings are going to fund an expansion of the Pell Grant program, which enables a lot of middle class and lower class families to attend universities and colleges that they otherwise could not afford.
Put simply, yesterday, we as the taxpayers took all of the risk with little of the reward. In the future, we will be taking the same risk and getting all of the reward. It's just good business. The student loan reform bill is expected to save taxpayers more than $68 billion over the next decade and goes into effect in 2014.
That is good for us as a civilization because the more engineers, scientists, mathematicians, actuaries, and software programmers we have, the better our chances of competing in a world where India and China, both of which dwarf us in terms of population, are working tirelessly to make sure their best minds are trained to compete with us. You all know I actually believe we can compete in a global economy and that there is no reason to fear either nation. The student loan reform bill makes that even easier.
For you, as investors, this may very well mean expanded access to student loans as well as lower interest rates on new student loans. The student loan reform bill also stipulates that payments cannot exceed 10 percent of your income, meaning an educated financed with one of these programs won't drive anyone to the poor house.
Of all the bills that have been signed in the past 25 years, the student loan reform bill makes my top 10 favorite both as a self-made successful business owner, investor, and executive and as a citizen. The government is finally doing something that a business owner would and paying for it with profits from existing operations rather than issuing more debt. Even those of us who are already through the higher education system benefit in the form of a better educated work force.
When the Pell Grant program began, it covered 75% of the cost of attending a four-year university. Today, it covers barely 33%. This is no different than the inflation adjustment the GI bill received a few years ago to bring the program back in line to what it was for our parents and grandparents. Furthermore, students can pay their loans off in half the time (10 years) if they do support their community as a nurse, member of the armed forces, or other comparable line of work.
Another rerally good article by Joshua. I agree that I am not a fan of a lot of the programs put in place by the federal government. Most thigns the governement touches turns to dirt within years.
But I think Student Loan reform was certainly needed. Students go to school and spend the next 10-15 years trying to pay it down.
I finally payed down my student loans and I can FINALLY start investing. I put a little into stocks but I just found out about IRA’s.
I wish I knew about IRA’s sooner instead of putting my money in a 401k. For some reason IRA’s get over shadowed by 401k’s but IRA’s have more benefits
I found a good website that handles IRA’s and it invests in Real Estate. With the Real Estate market getting ready to turn back around, it seems like an intriguing idea. Maybe Joshua could write an article on IRA’s soon(please!!)?
http://www.capitalIRA.com
Why is the federal government in the student loan business in the first place? I am for education but not at the expense of violating our founding principles of limited government. Stop overtaxing income earning citizens and giving it to those who it does not rightfully belong. Further, money should be lent to those who deserve it (have the means to pay it back) and not to those who want it (subsidies to those who don’t have the means to pay loans back). The cost of education is completely out of whack largely due to the willingness of lending agencies to get people focused on monthly payments rather than total cost. Enough is enough.
Garrett,
As someone who pays substantial taxes and has a household income far above the average American, I think you are looking at the problem incorrectly, although your sentiments are sincere (and good).
Those of us who are wealthy benefit tremendously from an educated base of citizens. In the case of the student loan program, which represents a tiny fraction of the overall government expenditures yet directly affects almost all of our lives, having more engineers, software programmers, chemists, and nurses far outweighs the tiny addition to our income and corporate taxes. This is one of the few government expenditures I don’t mind supporting because I benefit from it, my companies benefit from it, my shareholders benefit from it, and the economy benefits from it.
In other words, here is how we look at it:
1.) The higher the average national income, the wealthier I and the other rich members of the nation grow because the more money people have to spend on our products and services.
2.) The direct, most proven way to increase earnings power is higher education.
Of course, this doesn’t apply if someone borrows $100,000 and goes to get a degree in basket-weaving. The world will always have its share of idiots and the United States is no exception.
For example, we know there is a chronic shortage of doctors expected to occur over the next 10 to 20 years. This will cause health care costs to rise. Aren’t we all better off paying lower costs now in the form of training more doctors through student loan programs rather than later when we have longer lines, overworked medical professionals, and demand far exceeds supply. This isn’t the type of industry where the market can adjust itself within a few short years because we require almost a decade of training for most medical doctors when you factor in specialties!
Many Latin American countries have far lower educational opportunities than the United States and look at what it has gotten them. High illiteracy rates mean they aren’t even in the ballpark when it comes to competing for jobs in high tech, energy, or other industries. That’s why the average household incomes in those countries are pathetically low.
You do make one excellent point: The cost of education (not to mention cars, houses, and other assets) is substantially higher because the average person focuses on the payment they can afford rather than the total cost of ownership.
In the future, though, realize that if we were to end student loan assistance, your children and grandchildren would live in a country more akin to those found in Central America than here. It won’t matter to me as an individual because I’ll always be fine, but it matters to me as an American because it’s bad for the country.
I know this will never happen, but wouldn’t it be a good idea if the student graduates his loan is forgiven, if he doesn’t finish he has to pay back the money. Makes you want to graduate.
I have little confidence in the government, especially the fed to do anything that actually benefits the American people.
That said, they have no constitutional right to do this and frankly they have no business doing it! This will be a net increase in cost because the government is essentially incapable of doing anything as well or as efficiently as the private sector. Somebody ALWAYS has to pay the price. Besides that, you can be certain there will strings attached.
No, I didn’t read this bill and I don’t know much about student loans but I do know something about the nature of government and because of that I have little confidence that they will do anything right. Their first job is to get out of the way!!!!
I also disagree with your statement that modern education would be impossible without student loan programs. Here are a few reasons why:
1. Debt increases the cost of anything.
2. It is possible to get a good education without debt.
And besides that,
3. Going to college does not guarantee a wage increase.
4. Going to college doesn’t even guarantee an increase in useful knowledge!
5. An awful lot of money is wasted on ‘education’.
The Federal government is already wasting an unbelievable amount of money on education and this is going to be more of the same.
Another point you made about them cutting out the middle man, they didn’t cut just out the middle man, they cut out private business. Perhaps there is a problem with tuition rates but the solution is not more government. It is likely that they created the problem on purpose so that they can then be heroes and solve it. They have ultimately solved nothing but they have increased the size and scope of government.
As long as a majority of people are willing to allow government to grow when it benefits them, it will continue to grow and we will continue down this hill on which we find ourselves. At the bottom of which is a total takeover of every aspect of our lives, i,e, a totalitarian regime.
Think I’m nuts? Look at the signs, look at history, look at other countries.
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