I signed a petition last week, called “Support the Student Loan Forgiveness Act of 2012” and then shared it on my Facebook page. One of the comments drew my attention and incurred a short debate. The commenter wrote: “Can’t do it – Why do people go to college, can’t pay for it, get a degree that’s relatively worthless, take out loans they can’t pay back?“

Ignoring the “degree… worthless” part (how many of those “worthless” degrees are responsible for major cultural and commercial contributions?), I argued that many peoples skills and passions do not fall into jobs like I.T. or medical work, but often into jobs that have dried up in this economy. To that the commenter wrote: “Then us tax payers just expect those passionate types to either pay their debts or find a cheap passion. It’s time for folks to be adults – as my grandparents talked about in the Great Depression – and work to not be a burden – [....] not easy but had to put on the big boy pants to live up to my grandparents farming work ethic & independence – I’m an odd duck I know“

After I swallowed my irritation at this person’s self-righteous tone (my grandparents – like many – grew up in that era and continued to have tough times through the fifties, and also had that “farming work ethic.” And I am a farm girl. Spent quite a few of my childhood years feeding pigs and cows, thank you very much.), I gave the exchange more thought.

It was the second time that week I had been told some degrees are worthless. Worthless. Art. English. Theater. Music. Worthless? Educating one in the fine arts within academia – to these people – is not as valid as being educated in science, sociology, psychology, or business. One critic said, “You can teach yourself these things. Why go to school?” True, you can teach yourself many things. I hear people teach themselves many things from the internet and books, including how to enact violence. But higher education yields many benefits to those in the fine arts – a community, challenging dialogue and exposure to new ideas, otherwise expensive to own facilities, difficult to access resources, and an intensive environment in which to quickly adapt one’s skills. And one could offer the theory that the more people are placed in fields that use their skills (even if low-income), rather than less-suitable fields with higher incomes, the more healthy society could be overall. Personal happiness can do wonders to alleviate health problems and negative behaviors which often create an undue burden on society. Perhaps these critics might give their words more thought before dismissing an entire facet of cultural production.

My husband made the excellent point that these men were citing the monetary value that medical or engineering fields yield, which enable the student to more quickly pay their debts. On the other hand, most fine arts majors work incredibly hard after their degree, working outside of their “day job” to pursue their work. The student loans don’t wear off so quickly when one is making only $20 or $25 thousand a year while developing themselves professionally in their “free” time.

Found on Facebook

Despite the slim future income earnings for these fields, people still flock to schools to learn about the arts. The value of these fields if calculated solely on income earnings would appear they have no value at all, yet individuals inherently recognize a greater value in cultural production and study. And yet society overall continues to take these cultural contributions for granted, and consistently undervalues their dominating presence in their daily lives. It is maddening to say the least.

Still, I couldn’t deny these negative sentiments came from a legitimate place. Not many are easily inclined to help others who made “bad” choices, though I would never call being educated (and taught to critically think) a bad choice. Maybe they had a point….

But then I remembered bankruptcy. Those individuals who file Chapter 13 bankruptcy may keep their homes and other non-exempt personal assets, despite their poor spending habits. But did you know student loans are not forgiven in bankruptcy? Or what of the woman leading the lawsuit against the Affordable Care Act? She has recently declared bankruptcy. For medical bills. My point here is that a lot of people make a lot of bad choices and are helped out. Maybe not bailed out. But helped nonetheless.

Stafford student loans offer a number of flexible repayment options, but the major problem with student loan debt is that these options often help in the short-term while creating inescapable long-term debt problems. For example, if one cannot pay the standard, or 30-year term, payment, the borrower can apply for income-based repayment. This repayment term, while financially manageable in the short-term (the borrower can afford to eat and live on their income while paying a meager sum to their lender), often creates a bigger economic impact in the future thanks to capitalized interest.  Each month you don’t pay your interest it is added to the principal; you will be forever charged interest upon that interest until your debt is paid. For most low-income borrowers, this means paying double the amount they borrowed. And unlike a home mortgage (which have incredibly low interest rates – lower than student loan rates), the student has no equity. Home owners have something they can sell to pay off that mortgage loan. Student loan borrowers don’t. And these days, the long-term financial advantage of an education yielding a good-paying job is pretty rare.

source of image: http://www.salon.com/2012/03/12/kids_today_still_screwed/

So why should tax payers care? Because this group of borrowers is growing exponentially. Defaulting on loans has increased tremendously. Wages are down. Jobs are non-existent. But interest keeps accruing. Debts continue to climb. And this means fewer consumers. Fewer consumers means lower wages and fewer jobs. It is a vicious cycle. Since America is a strongly consumer-based economy, we are in trouble. These borrowers can’t buy homes – their educational debt totals the cost of a small home in many circumstances. New car? Forget it. Vacations? Nah. Kids? Can we say “social welfare?” 401K? Haha. You’re so funny.

But if we could make these borrowers into active consumers again, we would create more wealth in the economy. Call me simplistic in my thinking (probably am when economics are the subject, sorry), but that would create a greater demand for services, which creates a need for jobs, which enables more people to spend more money and pay more bills!

I wonder if demonizing the student borrower as “lazy” has contributed to some corporate-friendly legislation of years past. The Wall Street Journal calls borrowers on income-based repayment programs “deadbeats.”  The Direct Loan program is criticized for giving loans indiscriminately. Schools are called “corporate-minded youth resorts” by Andrew Hacker and ­Claudia Dreifus in their book “Higher Education?: How ­Colleges Are Wasting Our Money and Failing Our Kids—And What We Can Do About It” (as mentioned in the article “The University Has No Clothes” in New York Magazine). Obviously there is a lot of reform needed on all fronts and blame can be divvied out to the banks, schools, and students.

But if one acknowledges the value of an education – including the liberal arts – and if one acknowledges that a person can work very hard at their goals and job and still come out on the bottom of the income ladder, then there is a very good reason to address student loan interest regardless of who is to blame for all the debt.

Here’s my proposed solution. Don’t forgive the debts. [Even if we wanted to, I doubt that would ever happen in our legislature anyhow (I hear the screams now: Socialism!!!). Fine. After the housing crisis where homeowners were not bailed out, I am sure students will be equally denied.] But since the Fed is loaning out money to banks/lenders with no interest, and the banks are making record profits, maybe the government could do the individual loan borrower a solid. So here goes:

• Lower the interest rates on all Stafford, Plus, and Perkins loans to 1%. Permanently. For undergraduate and graduate loans. For future borrowers and current borrowers. In this scenario, most people could pay their interest, chip away at the principal and maybe have something left over to be part of our consumer economy. Oh, and there would be fewer defaults, which means less paperwork, and more overall happiness for everyone. And those “deadbeat” borrowers? They would have little excuse to not pay something on their loans, if only the interest payment.
• Have the government buy up private loan debt at an interest rate of 2%, applying all repayment options available to Stafford loan borrowers to these borrowers. Would this in turn encourage more competitive interest rate offerings through private lenders?
• Student loan interest will not capitalize into the principal. Ever. Paying interest on interest often means the borrower will double their debt in accrued interest due to a poor economy, rather than pay it off. What might have been viewed as an “incentive” is more like a noose around the borrower’s neck. I wonder if this policy is significantly to blame for borrowers defaulting on loans as their interest on their interest grows year after year.

The “for profit” student loan lending industry is creating a huge probability that in twenty years we will have a student loan bubble collapse greater than that of the housing bubble. With my reconfigured interest model, capitalism is still honored, profits are made. People can still attain a higher education, which is good for the country. Students are still held accountable for their debts 100% but they will actually have a fighting chance in doing so. And the middle-class earners should love this too, because it is more money in their pockets (and their kids’ pockets) too.

It is win-win situation when we lower student loan interest without forgiving the debt. It is a lovely compromise to avoid a future financial disaster. Student loan borrowers (most of us anyway) do not want a hand out. We just want a fighting chance.

Some related links:
Forbes on defaulting rates
Salon.com on student loan debt
Washington Post on loans as the next “economic bomb”