Tag Archives: Borrow and Spend

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Obama’s irresponsible student loan policies leave taxpayers with trillion-dollar bubble

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President Obama's student loan bubble
President Obama’s student loan bubble

This is from Investors Business Daily.

It says:

In 2010, Obama eliminated the federal guaranteed loan program, which let private lenders offer student loans at low interest rates. Now, the Department of Education is the only place to go for such loans.

Obama sold this government takeover as a way to save money — why bear the costs of guaranteeing private loans, he said, when the government could cut out the middleman and lend the money itself?

The cost savings didn’t happen. In fact, the Congressional Budget Office just increased its 10-year forecast for the loan program’s costs by $27 billion, or 30%.

What did happen was an explosive growth in the amount of federal student loan debt. President Clinton phased in direct federal lending in 1993 as an option, but over the next 15 years the amount of loans was fairly stable. The result of Obama’s action is striking. In each of the past six years, federal direct student loan debt has climbed by more than $100 billion. (See chart.)

And since Obama keeps making it easier and easier to avoid repaying those loans, it’s a problem that taxpayers will eventually have to shoulder.

Through words and actions, Obama has encouraged irresponsibility on the part of student borrowers. He constantly talks as if student debt were an unfair burden they unknowingly had foisted upon them.

At the same time, he’s made it easier and easier to avoid paying back student loans in full. Earlier this year, for example, Obama expanded eligibility for his “pay as you earn” program, which limits loan payments to 10% of income, with any debt left after 20 years forgiven.

Students got the message. The St. Louis Fed reports that 27.3% of student loans in repayment are at least a month behind in payments. That’s a far higher delinquency rate than any other kind of debt, and it’s significantly higher than the delinquency rate 10 years ago.

“This overall level of delinquency is very concerning,” concluded authors Juan Sanchez and Lijin Zhu.

A 2013 Consumer Financial Protection Board report found that less than half of this federal loan money was actually being paid. About 30% was held by borrowers still in school or in a grace period, another chunk in deferment or forbearance, and almost 14% was in default.

The problem here is that whenever the government nationalizes something that the private sector is doing, it always creates a problem. Let me explain. If student loans (or mortgage loans) are run solely by the private sector, then the motivation for lending money out at interest is to make money for the bank’s depositors and investors. In other words, because the bankers are in a free market and have to compete for depositors and investors, they have an interest in making sure that the loans they make get paid back.

But when the government takes over loans, they are not interested in being wise with the money they lend out – it’s not their money. They want to lend out as much as possible today in order to buy votes, and then kick the can down the road on the repayment. So instead of being careful about asking “will this get paid back?” they ask “how can I borrow from the future in order to buy as many votes as I can right now?” And that’s how we got the housing crisis of 2008, as well as this trillion-dollar student loan crisis.

When you take the profit motive out of the lending decision, then money gets lend to people who will never be able to pay it back. No private bank that has to answer to shareholders hands out money to students who want to study underwater basket-weaving. But the government does. They want to buy as many votes as possible. And besides, this is not their money. They are borrowing it from the future earnings of the very students they are giving it to! That’s what happens when you let big government decide everything.

Whenever big government politicians want to buy votes with taxpayer money, they always sell it to the people with sob stories about some poor, helpless group of people will suffer through no fault of their own. There are a lot of voters who will vote for politicians who cry crocodile tears for them, especially ones who don’t understand economics. There is no free lunch – somebody has to pay. Democrats are basically throwing a party for students, and then mailing them the (unexpected) bill for it, with interest.

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National debt up more than $10 trillion since Pelosi/Reid budgets of 2007

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This post is from Red State.

Excerpt:

Despite his promises to cut the deficit in half by the end of his “first” term, Obama  racked up the largest deficits in U.S. history:

  • FY2009: The federal budget deficit was $1.413 trillion, the highest in U.S. history. (“Monthly Budget Review: November 2011,” Congressional Budget Office, 11/7/11)
  • FY2011: The federal budget deficit was $1.299 trillion, the second highest in U.S. history. (“Monthly Budget Review: November 2011,” Congressional Budget Office, 11/7/11)
  • FY2010: The federal budget deficit was $1.294 trillion, the third highest in U.S. history. (“Monthly Budget Review: November 2011,” Congressional Budget Office, 11/7/11)
  • FY2012 The federal budget deficit was $1.090 trillion, the fourth highest in U.S. history. (“An Analysis of the President’s 2013 Budget,” Congressional Budget Office, 10/5/12)

You shouldn’t be shocked by Obama’s failure to reduce the deficit in half by the end of his first term in office. He did warn us there would be “trillion-dollar deficits for years to come.”

Interest expense on the national debt is what sinks countries. The zero interest rate environment we have today masks the problem. When we return to normal interest rates, say 6%, our interest expense will jump to approximately to 25% of tax receipts. We have recently seen what happens to countries with debt problems similar to ours. Spain, Portugal, Greece, and Argentina all brought to their knees by excessive debt.

Heritage Foundation economist Stephen Moore:

Here is the biggest worry about an $18 trillion debt: What happens if/when interest rates start to drift back upward? Answer: This is the economic equivalent of the nuclear option.

Each 1-percentage-point rise in interest rates causes the U.S. deficit to rise by more than $1 trillion over ten years. So a 300-basis-point rise in rates — nothing more than a return to normalcy — would mean about $5 trillion in federal deficits.

If that happens, the debt-servicing costs grow astronomically and interest payments would become the biggest expense item in the budget. We start to pay more and more taxes just to finance past borrowing. This is what happened in Detroit; look at how that turned out.

Maybe this debt bubble won’t burst. Let’s pray that it doesn’t. If it does, the 2008–09 real-estate crash could look like a picnic by comparison.

[…]Oh, and we’re still borrowing half a trillion a year, so the debt will likely hit $20 trillion sometime before 2018. Have a nice day.

In 2007, when Nancy Pelosi and Harry Reid took over the spending, the national debt was only 8.5 trillion!

I am really hoping that interest rates will go up. Not only would it help me personally to get a predictable return on my investments, but I would like the people who voted for the Democrats to perceive (when it blows up) that lowering interest rates and borrowing trillions of dollars was not the right way to achieve real economic growth. The economy looks better if you throw 10 trillion dollars of borrowed money at it, but it’s not sustainable. In fact, it seems as if the left is always trying to wreck the economy with one bubble or another. It’s not just reducing mortgage lending requirements to create a housing bubble, it’s reducing student loans requirements to create a higher education bubble, and it’s reducing interest rates to create a debt bubble. It’s almost as if they were trying to destroy the economy.

News

Will the Social Security and Medicare programs be there for young Americans?

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Of course not, and the voting in Democrats that they seem to like to do is making it worse.

Here’s an article from the Daily Signal to tell about it.

Chart first:

Social Security insolvent in 2024
Social Security insolvent in 2024

And now the story:

Social Security’s trustees projected in 1983 that the recently enacted Social Security reforms would keep the program active for at least the next 75 years, through 2058. However, according to research by Rachel Greszler, a senior policy analyst, and James M. Roberts, research fellow for economic freedom and growth at The Heritage Foundation, that approach date has accelerated.

“If the trend since 1983 continues, the program will become insolvent in 2024—34 years earlier than originally projected,” Roberts writes.

Now you might think that the way Democrats appeal to younger voters, that they are taking care of this problem for them.

Well, here’s an article from Investors Business Daily.

Excerpt:

The White House recently conceded that President Obama’s executive order effectively legalizing an estimated 5 million undocumented immigrants means that newly legalized workers will contribute to Social Security and Medicare and be eligible for benefits.

Does the president have any idea how much money his action could cost the country — i.e., taxpayers?

[…]The Social Security and Medicare Trust Fund trustees estimate the two program’s combined long-term unfunded liabilities — the estimated amount the government will have to pay in benefits above what it expects to receive — at about $49 trillion. Obama’s amnesty action greatly exacerbates the problem, because retirees get back far more than they pay in.

[…]Because the U.S. pays hundreds of thousands of dollars in retirement benefits, on average, for each new retiree, whether part of Obama’s amnesty program or not, the president has just vastly worsened the long-term financial condition of the country’s two primary retirement safety nets.

But Obama’s newly legalized workers will impose even heavier losses than Steuerle’s examples.

Most workers pay into the programs for their working careers, between 40 and 50 years. But millions of Obama’s newly legalized are working-age adults with children, so many could be in their 40s or older.

Thus they could pay FICA taxes for the next, say, 15 or 20 years — less than half the average American worker — and be eligible for the full array of Social Security and Medicare benefits.

In addition, most will be lower-income workers. The U.S. Bureau of Labor Statistics estimates that foreign-born, full-time workers earn about 80% of native-born Americans ($33,500 vs. $41,900).

Social Security is a social insurance program and is structured to provide disproportionately more benefits for lower-income workers. Medicare pays the same regardless of how much a worker pays in.

To be sure, these new workers’ entry will likely help the trust funds initially, because most will be paying in rather than taking out.

Under current rules, workers must pay FICA taxes for 40 quarters (10 years total) before being fully eligible for the programs. But within a few decades the oldest will start retiring.

Given the demographic unknowns, estimating the amnesty’s financial cost to our retirement programs — and so to U.S. taxpayers — can only be approximate.

But using a basic simulation model, we believe the government will receive about $500 billion in payroll tax revenue (including Part B and drug premiums), and expect it to pay out some $2 trillion in benefits over several decades.

Yeah, so they are actually making it worse. But hey, at least we have redefined marriage, right?

As if that were not enough, there’s this lovely story from CNS News.

Excerpt:

The Daily Treasury Statement that was released Wednesday afternoon as Americans were preparing to celebrate Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started just eight weeks ago in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.

The only way the Treasury could handle the $942,103,000,000 in old debt that matured during the period plus finance the new deficit spending the government engaged in was to roll over the old debt into new debt and issue enough additional new debt to cover the new deficit spending.

This mode of financing the federal government resembles what the Securities and Exchange Commission calls a Ponzi scheme. “A Ponzi scheme,” says the Securities and Exchange Commission, “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors,” says the Securities and Exchange Commission.

“With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue,” explains the SEC. “Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”

Now you might ask yourself – are young people aware of these things? Of course not. What they learn in university is how to escape their repressive religious backgrounds by experimenting with risky, irresponsible sexual behavior. They are not aware of the situation, and when they vote, they vote like they were picking candidates on American Idol. I guess I can understand why young people act stupidly. They are concerned with what the culture tells them to be concerned about, and that’s legal baby-killing, redefining marriage to separate kids from their mom or dad, police shooting people who commit crimes, a nonexistent gender pay gap and global warming. What is appalling to me is when their parents vote Democrat… which is basically voting to have a higher standard of living for themselves, then passing the bill onto to their kids. It’s especially amazing when married women do this to their own kids. What are they thinking?