Tuesday, May 15, 2012

Student With Federal Loans: Uncle Sam Can Take 15%!

The New York Times launched a new distraction in its two and a half page expose of the student loan racket entitled A Generation Hobbled by the Soaring Cost of College. The Times deplores that college students and their parents have been duped into taking on debt like naïve home buyers, that tightfisted Republican legislatures are to blame, and that we could have avoided the problem with another stimulus. The Times does not mention that student loans are not protected by personal bankruptcy and that the federal government can garnish 15% of scofflaw wages. The real villain is Uncle Sam!


In typical Times fashion, the story begins with a victim, who has been taken the the cleaners:

Kelsey Griffith graduates on Sunday from Ohio Northern University. To start paying off her $120,000 in student debt, she is already working two restaurant jobs and will soon give up her apartment here to live with her parents. Her mother, who co-signed on the loans, is taking out a life insurance policy on her daughter.  “If anything ever happened, God forbid, that is my debt also,” said Ms. Griffith’s mother, Marlene Griffith. “As an 18-year-old, it sounded like a good fit to me, and the school really sold it,” said Ms. Griffith, a marketing major. “I knew a private school would cost a lot of money. But when I graduate, I’m going to owe like $900 a month. No one told me that.”

Who are the villains who duped the helpless Griffith, her parents, and others like her into taking on this unreasonable debt burden? For-profit schools, private schools with slick brochures promising ready-made financing, anti-tax republicans, and rising tuition in state schools, where Republican legislatures have cut back on higher education funding:

There is an ideological and political tug of war as well. State Representative John Patrick Carney, a Democrat, said if legislators were serious about financing higher education they could find a way, like eliminating tax breaks for corporations. He noted that even as funds for higher education were being reduced, Mr. Kasich and the Republican-controlled Legislature eliminated the state’s estate tax, which will cost the state an estimated $72 million a year.

 The subliminal message: If only Obama had gotten a second stimulus, the states would be awash in money.

The Times let slip that “federal mandates and court orders have compelled lawmakers to spend more money on Medicaid and primary education, too.”

Never one to bad mouth a federal handout program, the Times rushes to assure its readers that a wholesale default “would be unlikely to ripple through the economy with the same devastating impact as the mortgage crash. Though now larger than credit card and other consumer debt, the student loan balance remains smaller than the mortgage market, and most student loans are issued by the federal government, meaning banks wouldn’t be affected as much.”

In other words: If students don’t repay, the taxpayer will, but who worries about the taxpayer?

The Times fails to identify the real Simon Legree of the student loan program – the federal government itself. According to the Debt Collection Improvement Act (passed under Bill Clinton):

The US Department of Education (ED) is authorized to garnish 15 % percent of the erstwhile student's disposable income in lieu of unpaid student loans. The organization, that employs the student after graduating/dropping out of school, is expected to comply with rules regarding garnishment even in the event of filing bankruptcy.

As Congress debates how to pay for continued subsidization of interest rates on college loans, the Feds’ power to take 15 percent goes unnoticed.

Dr. Gregory's latest book can be found at Amazon.com.


  1. Everyone tries to give the invisible hand a hand and still expects it to be invisible (and do its job).

  2. Ronald Coase, age 102, would lucidly argue for no government guaranteed loans.

  3. Markets have surprised even Prof. Coase (How China Became Capitalist). Coase: "I thought it would take 100 years, if not more." Public intervention is another way of speeding the market outcome at a price that discounts the notional outcome to get a sub-optimal one. The speeding process yields rent for the policy makers.

  4. A letter from Ronald Reagan (1984). It is self contain, but reference is provided below.

    Dear Andy:
    I'm sorry to be so late in answering your letter but as you know I've been in China and found your letter upon my return.
    Your application for disaster relief has been duly noted but I must point out one technical problem; the authority declaring the disaster is supposed to make the request. In this case your mother.
    However setting that aside I'll have to point out the larger problem of available funds. This has been a year of disasters, 539 hurricanes as of May 4th and several more since, numerous floods, forest fires, drought in Texas and a number of earthquakes. What I'm getting at is that funds are dangerously low.
    May I make a suggestion? This administration, believing that government has done many things that could better be done by volunteers at the local level, has sponsored a Private Sector Initiative program, calling upon people to practice voluntarism in the solving of a number of local problems.
    Your situation appears to be a natural. I'm sure your mother was fully justified in proclaiming your room a disaster. Therefore you are in an excellent position to launch another volunteer program to go along with the more than 3,000 already underway in our nation—congratulations.
    Give my best regards to your mother.
    Sincerely, Ronald Reagan
    -- From Reagan: A Life in Letters

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