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Recently, several major financial institutions downgraded their forecasts for China’s economic growth. Estimates have fallen considerably to around 7.5%, from earlier expectations nearing 8.3% and above. These estimates, which coincide with both the nation’s 2013 target and a level that has not been seen since 1990, do not seem immune to further collapses. Several factors have played into the downgrades. China’s flash PMI, which is a measure of factory activity, contracted this week for the first time in seven months. And this is expected to parlay into the official PMI. Bubbling housing prices are still rising stubbornly, despite the government’s efforts to suppress them. Austerity is looming as new projects fail to yield more jobs. And wages are growing at a five-year low. In short, the dynamics of construction cannot maintain a strong economy. Yet that has been China’s strategy for a while now. But do not fear. The slowdown in their economic growth could actually do some long-term fiscal and social good.
China’s riches have yet to translate into a booming middle-class, or a notable increase in freedom for its people. The East Asian economic behemoth’s dimming growth prospects, surprisingly, are likely to allow the nation to do some much needed soul searching. Their new prime minister, Li Keqiang, pledged Friday to reduce the role of government, and allow free market forces to more greatly influence their economy. With this in mind, if household consumption can get past 50% of GDP, China will finally be on the path to long-term sustainability. With rising national wealth comes a larger middle-class, comes greater influence from the people. Though there will definitely be economic stumbling blocks from the new economic group (such as environmentalism), that is not necessarily bad. It is the path China is already on, with the world’s number one polluter pledging to cap carbon emissions by 2016. This shift should be met with open arms.
The deadline for Congress to mitigate the current student loan mess is July 1, 2013. If a plan is not agreed to by then, interest rates on subsidized Stafford student loans will double from 3.4% to 6.8%. The Brookings Institution seems pretty optimistic about the political stuff — they are saying that Democrats, the White House, and Republicans are beginning to see eye-to-eye on student loan reforms. I disagree. Sure, the three groups agree that market forces should be introduced to stabilize student loan interest rates (which is good!), but afterwards the agreement begins to considerably wane. With ideology taken into account, only two groups exist: leftists who believe government should go out of their way to fund student loans, and right-wingers who disagree. And these views translate into the most prominent policy prescriptions on this issue.
But first, it is worth examining why market forces should be introduced into the student loan racket. For whatever reasons, interest rates are at historic lows. The political rationale is that as many folks as possible should be able to capitalize on this. So yeah, subsidized Stafford loans go for a 3.4% interest rate right now. But as a comparison, a 30-year fixed-rate mortgage costs 3.6% interest, and a 15-year mortgage costs 2.75% interest. Meanwhile, the 10-year treasury note has around a 2% yield. This is recognized under most proposals, wherein rates would somehow be linked to this note, since student loans usually take 10 years to pay off.
President Barack Obama’s proposal would lock in the 10-year Treasury note yield during the day of the student loan’s signing. Here are the added premiums in his plan: .93% (subsidized Stafford), 2.93% (unsubsidized Stafford), 3.93% (PLUS loans). The Congressional Budget Office estimates that these will be the 2013-2014 final interest rates for the aforementioned loans: 3.43% (subsidized Stafford), 5.43% (unsubsidized Stafford), 6.43% (PLUS loans). This is expected to be budget neutral. Interest rates will not be capped.
Rep. John Kline’s (R-Minn.) proposal takes things a step further — in the wrong direction. The chairman of the House Committee on Education and the Workforce entirely agrees that variable interest rates are the way to go. But the added premiums are ridiculous: 2.5% (All Stafford loans) and 4.5% (PLUS loans). His interest rate caps would be 8.5% (Stafford) and 10.5% (PLUS). It is actually pretty funny that in the past decade, the highest interest rates barely would have come near these caps. So these interest rate caps are pretty much useless. Moreover, the program would have a $3.7bln surplus. Pragmatic reasoning would use this surplus to lower rates; the GOP would likely use this to reduce the deficit. If it was up to Republicans, they would eliminate student loans backed by the federal government. Kline’s plan does not take the disadvantaged members of society into account. He does not care about necessity, but efficiency. His plan puts subsidized and unsubsidized loans on the same playing field, with equal premiums. This is a bad look for the GOP.
Senate Majority Leader Harry Reid (D-Nev.), and Senate Majority Whip Dick Durbin (D-Ill.) have a proposal similar to Kline’s, but it swaps out the 10-year treasury yield for the more volatile 3-month nominal rate (91 days). The premiums would be decided by the Education Secretary. A cap of 6.8% would be set, which is more equitable, and has a chance of kicking into effect, and actually meaning something. Another proposal from Reid and Sen. Tom Harkin (D-Ia.), chairman of the Senate Health, Education, Labor and Pensions Committee, would extend current rates (3.4%, Stafford) for 2 years.
Thursday, the House of Representatives passed Kline’s bill. Obama said he would veto it because of the lack of certainty it provided. In this economy, students deserve better than the pure free market. Student loan debt is the biggest worry for millenials; one third of them regret going to college because of that. Defaults are rising; delinquencies are at record highs. The free market is great, but it is not perfect. It would be irrational to take away the government safety net in a government program.