Bernie Sanders received some hefty backlash and ridicule on Twitter for this tweet:
The blogosphere responded similarly, but with more informed criticism. Megan McArdle and Steven Horwitz, for example, had great points.
Many of the responses correctly pointed out that loans like mortgages and auto loans have collateral—if the borrower can’t pay back the lender, ownership of the house or the car is transferred to the lender. The lender usually then sells the asset to recover as much of unpaid amount as possible. With student loans, the student can’t transfer ownership of their degree or education, and so lenders may charge more to cover the risk of default.
Others, like Megan McArdle, also look to the credit-worthiness of the borrowers in both cases. Students usually have short or no credit history, low or no income, and no way to guarantee payment, except with their own signature or a cosigner. Mortgages are given to those who have a longer credit history, at least some income, and a house as a collateral.
I’ve seen some respond to these criticisms by asking, “What’s the big risk with student loans?” We hear that student loans are almost impossible to renege on, even after declaring bankruptcy. If the lenders must get their money, even after default, then why do they charge such high rates compared to a home refinance?
Sanders Exaggerates a Bit
First of all, Sen. Sanders has exaggerated a bit in his tweet. Federal student loans to undergraduates today average 4.66%, and climb to 7.21% for Direct PLUS Loans to parents and graduate students (source). Technically his wording is correct—I’m sure SOME are paying 10% for a student loan, but that hardly represents the average.
He has also exaggerated downwards by saying some CAN borrow at 3% to refinance their homes. Bankrate.com shows 3.89% as the current average 30-year fixed refinance rate. These averages do get close to 3%, but only with 15 or 10-year terms.
Also, refinance rates are categorically different than other loan rates. Refinance rate offers have to compete with the rate borrowers are currently paying. Also, refinancing means that the borrower has had extra time maintaining a credit history. Sen. Sanders should have used regular mortgage rates to make a fair comparison. For example, the average 30-year fixed rate mortgage was 4.15% at the end of last month, according to Bankrate.com.
He’s comparing the high end of one kind of loan to the low end of another, instead of some average or median loan rate of similar types. We’ve narrowed the difference to 0.51% just by picking different numbers.
Student Loans Can Still Be Delinquent
Secondly, just because unpaid balances don’t disappear after defaulting on student loans, that doesn’t mean that the lenders always get paid. Recent loan data from the NY Fed show dramatically increasing delinquency rates for student loans, especially compared to other loan types:
Of course, the striking feature of these graphs is the housing bubble. Mortgage delinquency rose and peaked with the unfolding of the most recent business cycle.
The feature I’d point you to is the ballooning student debt problem, in red on both graphs. Not only are lenders not getting paid on those delinquent accounts, which might account for higher rates, but there doesn’t seem to be a response in total student loans, which seems to climb no matter what.
I’ve mentioned in a previous post that this is due to the federal government’s meddling. They have swallowed up 70% of all student loans and enacted numerous policies encouraging students to forgo more financially responsible and even lucrative options and instead sign up for four years of school to get a degree with dubious returns. As I mentioned in the earlier post, a Department of Education report admitted, “At 53 percent of institutions, more than half of alumni are not even earning more than a typical high school graduate within six years after starting at the school.”
Lenders Might Expect a Shift
This leads me to my last point: another driver of the difference between mortgage and student loan rates might be that private lenders of student loans are expecting some federal student loan forgiveness program from the federal government or other policies that would make it easier for borrowers to permanently cast off their student debt. This would replace the current setup where student debt basically follows you to the grave, or even government employment.
Indeed, there are already student loan forgiveness programs for people who work for the government (isn’t that convenient?), teachers, Peace Corps volunteers, US military, nurses, law enforcement, Head Start workers, child or family services workers, and early intervention service workers (source).
The student debt problem has become an important issue in the current presidential campaigns, but all of the major candidates’ proposals involve making college more affordable and easier to get into, when it seems that’s the problem in the first place.
Conclusion
In the end, we have to realize that market prices aren’t arbitrary. Student loan rates of 6-10% and home refinance rates of 3% might be objectionable to Sen. Sanders for some odd reason, but they are obviously acceptable to some people, or else nobody would make or accept those offers on the market.
To the extent that student loan rates and mortgage rates represent market prices (which is highly questionable), we should recognize that they are key to getting present money where it is most highly valued. The solution is not more price fixing, or “free college”, or a massive wave of loan forgiveness, but to let markets work through the voluntary exchanges of producers and consumers, employers and employees, and borrowers and lenders.
