Monday, December 22, 2008

New York State's New Student Loan Program: Instant Gratification Followed by Long-Term Pain

The Federal Reserve keeps cutting interest rates, down to an unprecedented 0% as last week, yet affordable private student loans are still tough to get, as commercial banks have concluded that student loans are not a profitable line of business. With an announcement by Governor Paterson last week, New York State is stepping into the student loan business with a $350 million low-cost loan program. The state loan program essentially socializes the student lending business, with the costs of defaults now shifting from private lenders to the state. In a statement about the initiative, Paterson said:

“In a time of rising borrowing costs and tightening lending by private banks, this new lower-interest student loan program I have proposed will help ensure New Yorkers have access to the funds they need to finance their college educations.”

The new loans will have an interest rate of 8 percent, higher than the federal loans which students will access before turning to state loans but lower than the going rate for private loans.

College students have shown an insatiable appetite for debt, so the new program will certainly be to their liking. Critics fear that too many college students will take advantage of the loan bonanza and that the result will be a sea of over-leveraged college graduates (and drop-outs), with grave consequences for them and for the state that will have to deal with their defaults. The imagined endpoint is a student loan default crisis similar to the mortgage foreclosure crisis. The ruse that loans make college affordable is not true; they merely make college accessible. It’s time more attention was paid to grants than to loans, as the Project for Student Debt advocates.

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