115th Congress, Congress, Education, House of Representatives, Issues, Obamacare, Senate

If we’re repealing Obamacare, Congress might as well bring back private student loans, too

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As high school seniors make their decision of which college to go to next fall, Congress has been working on its Obamacare decision; but what the American people might be missing, is that these two issues are extremely closely related.

As student loan interest payments fund the Obamacare subsidies, students are being forced further into debt while their tuition climbs.

The Obamacare legislation worked to cut banks like Sallie Mae out as the middle-man between lenders and borrowers, this sent 69 percent of student loan profits, roughly $8.7 billion a year, to pay for Obamacare programs.

Image Credit: DonkeyHotey CC by 2.0

The need to fund these programs has caused the federal government to spike interest rates on loans significantly.

The Hill’s Dick Morris explains that the federal government borrows the funds for student loan programs at 2.8 percent, and then lends it to students at roughly 6.8 percent; accounting for a 4 percent mark up in interest rates just to fund liberal health policy.

By hurting private sector job creation, Obamacare has in part made loan repayment even more difficult. The Consumer Federation of America in a study from early March found that a total of $137.4 billion in balances were in default in 2016, an increase of 14 percent from 2015. The report continues to explain that for the last 3 years, each year the federal government has increased the amount of loans owned or guaranteed by the government by approximately $80 billion.

By expanding the student loan program but not creating enough jobs for college graduates, Obama helped to increase student debt to a point where it is nearly impossible to pay them back.

Perhaps the largest concern, is that aside from costing students more on loan payments, these loans also spike the cost of college. The Wall Street Journal in July 2015 revealed that as student loan access and college aid increased from the federal government, cost of college has increased as well. The Journal notes, “for every new dollar a college receives in Direct Subsidized Loans, a school raises its price by 65 cents. For every dollar in Pell Grants, a college raises tuition by 55 cents. This is one reason tuition has outpaced inflation every year for decades, while the average borrower now finishes college owing more than $28,000.”

As the Hill’s Morris explained, “The nexus between the student loan program and Obamacare is purely opportunistic…The 16 million American students who now have student loans are paying for Obamacare out of their meagre incomes just at the point when they graduate from college and need funds to start their lives, buy their first homes and begin a family.”

Now, the Consumer Financial Protection Bureau estimates that there is about $1.3 trillion in outstanding student loan debt, with more than 8 million Americans in default on more than $110 billion in balances.

Then-U.S. Rep. Tom Cotton (R-Ark.) fought against this practice in 2014, claiming that Obamacare had “nationalized the student loan industry.” As a first-time congressman, Cotton attacked the legislation for taking money from students to pay for programs that only generated more costs.

Cotton, now a senator since 2015, was absolutely right. Just like in our healthcare system, the student loan crisis can only be solved through returning choice to consumers and utilizing the private sector.

Forbes.com contributor Preston Cooper argued in 2016 that student loans could be secured within the private sector through income based collateral. He offered a system in which lenders receive loans in exchange for portions of future income, verified from the IRS the same way mortgage lenders do.

By removing the government from the loan process, the private sector can set realistic rates and force universities to lower prices to an attainable place for students. Granting loans on the basis of a likelihood to be repaid, the traditional standard, will also direct capital to those majors that actually produce jobs.

However, currently, universities are encouraged to promote federal loan options to students first, so the private sector doesn’t even have a chance.

As long as the federal government squeezes the private sector out of the student loan process, the legacy of the Obama Administration will be that of higher prices and reduced opportunity. While students should be focusing on beginning their college education, Congress should be focused on removing Obamacare and reining in their influence over the student loan process.

This is a guest post by Natalia Castro a contributing editor at Americans for Limited Government.

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