Friday, April 17, 2015

Harmful Government 'Help' and the Law of Unintended Consequences ... Low and Middle-Income Individuals Suffer Most from Student Loan Delinquencies

Student loan delinquencies are highest among the individuals most in need of student loans. It's another great example of 'good' government intentions followed by the law of 'bad' and unintended consequences.

That said, who can be surprised when government programs fail to produce the promised results?

In any event, and with respect to unpaid student loans, the people most likely to default are the ones who the government is trying to help the most --- the students who come from low income families.

As news broadcaster Edward R. Murrow said, "The obscure we see eventually. The completely obvious, it seems, take longer."

Fewer low income borrowers benefit from student loans has this to say about low income borrowers and student loans:

"The borrowers struggling the most to pay off their student debt are exactly the people that student loans are designed to help. . . . low-income borrowers were more likely than their wealthier counterparts to default or be at least 120 days delinquent on their payments within five years of graduation, according to data released Thursday by the Federal Reserve Bank of New York. More than half of borrowers who left school in 2009 — during the depths of the Great Recession — and were living in households that earned less than $40,000 a year when they took out their student loans, were delinquent on their payments or in default within five years of leaving school. . . .                                    

“It presents a very difficult dilemma for policy makers,” Donghoon Lee, an economist and research officer at the New York Fed told reporters at a press conference Thursday. “These are the very groups of borrowers that student loans are intended to help the most, but at the same time these borrowers are struggling the most with their student loans.”. . .

Theoretically, student loans offer a pathway for poor Americans to reap the benefits of a college degree; bachelor’s degree holders earned $23,000 a year more than high school graduates, on average, in 2014 and were less likely to be unemployed, according to the New York Fed. . . .

But the benefit of taking out loans to attend college is particularly low for those who never graduate, a scenario low-income students are more likely to face. In 2013, about 21% of students in the bottom income quartile who entered college earned their bachelor’s degree by the time they were 24, according to a February report from Pennsylvania Alliance for Higher Education and Democracy and the Pell Institute for the Study of Opportunity in Higher Education. That’s compared to 99% of students who entered college from high-income families."

Summing Up

Education is a strong indicator of future earnings. All else being equal, the more education the better.

And this is especially the case for those who come from low and middle-income families.

That said, lots of low income individuals attend inferior K-12 schools and enter college unprepared to do the academic work necessary to be successful and graduate.

And if the student leaves college prematurely with lots of debt but no degree, that student probably would have been better off not going to college at all.

So when government programs encourage the unprepared to borrow money to attend college, or when the student isn't serious about doing the work required to get that coveted degree, a pile of debt awaits our 'poor' performer as he enters adulthood.

Government intentions which aren't combined with thoughtful actions are just political acts of grandstanding by politicians.

For the intended beneficiary and 'poor' borrowing student, these political showboat performances represent financial nightmares in the making.

That's my take.

Thanks. Bob.

No comments:

Post a Comment