Student loan modification for defaulters who have the vote

E. Ablorh-Odjidja

October 28, 2011

It is amazing to learn that those who are privileged enough to go to college on borrowed money are yet to be aware that there is nothing like free lunch about loan forgiveness.   

That sooner or later the public, including those who never got the loan for education in the first place, or derived the least benefit from the program, will have to pick up the tab for the forgiveness.

Some rush to think the proposal overall’s impact is going to be beneficial for all in the long run. 

But forgive me, these so-called compassion-based programs still point to the the same selfish political interest of those in power.

President Obama is pushing for the student loan modification program.

Huffington Post reports that the “plan will accelerate a measure passed by Congress that reduces the maximum required payment on student loans from 15 percent of discretionary income annually to 10 percent.

“The plan goes into effect in 2012, instead of 2014. Besides, the White House says the outstanding loan amount would be forgiven after 20 years…”  

The loan obligation vanishes after 20 years.  This is the offer.  And some people think it is compassionate.  But in reality it is political. It is about the 2012 elections and the chance to harvest more votes.  

Eventually, the plan will use public money to fund the loan obligation.  And the excuse is it is largely intended to help the poor. 

But so far, no other program is distinctly on offer to help the poor. Vouchers for school choice are not being considered. 

Of course, vouchers would have no immediate political gains for 2012. The beneficiaries are largely under the voting age, and so not politically attractive now.  At least, not yet.

Eventually, some will be ready to go to college.  But will the proposed student loan program benefit all; both the rich and the poor?

On first look, the existence of the program gives the impression of equal opportunity access to college.  In actuality, it is deceptive and highly likely to result in unequal outcomes.

But the rich will have the best outcome, with the loan's option of the low payment rate and the possibility of forgiveness. 

And given that they are already rich, they will now have two choices. They are likely to opt for the cheap student loan, while money previously earmarked for tuition can be stashed in trusts to earn dividends for their wards later.

The poor wards have only one option; to go to college on the student loan and pay later.  The defunct part is not an exclusive option since it is open to all.

But for four years, the advantages will be on the rich ward’s side; a chance to earn interest from his trust fund to start comfortably paying off the student loan and probably finish paying off the loan years later with some money still left intact in his trust.

The poor ward comes out of college with the loan payment waiting.  After 20 years, he may have the promised loan forgiveness.

For the poor, it would have been a forgiven story if the real pain does stop here. But the fiscal, social, and psychological costs still wait ahead, even after graduation and the loan forgiveness. 

Society will have to pick up the default payments in general taxes.  Even those who did not go to college will pay the taxes, including the poor.  There will also be subtle costs to the "loan forgiveness," and these will hit Blacks the most. 

The subtle costs can start immediately at employment.

Will loan forgiveness evoke empathy for the graduate or awaken latent biases against him in the employer’s mind; and with these biases (racism) impact on the position and salary on offer?

Presumably, in the mind of the biased the loan forgiveness would have taken care of the obligation society owed you.  So, the next best salary for the actual position will be the proffer.

There is more.  The loan forgiveness will eventually produce a stigma for Blacks, just as seen in other so-called Civil Rights programs like Welfare and Affirmative Action.

Programs designed by politicians for compassion and equity do not always end well for the intended.  And the twist that has happened to the Student Loan Modification program is an indicator.

The first Student Loan Modifications program in place in 2010 was done by Congress.  Before that, the loans were issued by private lenders, with guarantees by the Federal government.  This situation will change with the new proposal when the entire program comes entirely under Federal jurisdiction. 

This is when the program turns political.  The president, in this case, Obama, can exercise his executive powers to alter the payment arrangement, just in time for a political campaign.  The proposal starts January 2012, the year of the elections, instead of 2014 as originally planned. 

And it targets a political constituency, the student class whose support for Obama has been shaky lately.  Twenty years down the road they will be happy when the unpaid loans will be forgiven.  Both poor and rich students will be impacted, but resulting in different benefit outcomes.

Even with the benefit of the doubt on the side of intent, it may still be useful to look to the past to find possible measures in outcomes for intent.

The Community Reinvestment Act (CRA, amended in 1992), designed to help the poor own homes had mostly disastrous outcomes for them.   The availability of loans, with little scrutiny for risks, led to unforeseen abuses and the almost ruin of the world’s economy in 2008.

For a program that was meant to help the poor, mostly Black, it led to hurting them.  The rich and the banking institutions mostly came out unscathed.  The same result from the CRA can happen with the Student Loan Modification program.

Many Blacks will come to college little or poorly prepared.  And some will fail; leaving college no better off than when they came in.  But the loans will make the colleges and the professors rich.

The rich kid has a different outcome.  Even if he came out a wastrel, the program would have given him an added advantage of the trust fund while in college.  And when the loan forgiveness part is added after twenty years, he could end up more secure, with a comfortable lead in wealth accumulation. 

Unfortunate for the rest of society, the cost of the loan forgiveness will be spread on all, the rich, the poor, and Blacks, in a manner of `higher tax payments.

E. Ablorh-Odjidja, Publisher www.ghanadot.com, Washington, DC, October 28, 2011

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