President Obama's Student Loan Rate Proposal Saves Average Borrower 25¢ Per Day

    Reprising the Don't Double My Rate theme used during the 2012 presidential campaign, the White House is pushing a plan by President Obama this week to prevent interest rates on some student loans from doubling effective July 1.  However, the savings for most borrowers is rather less significant than might appear at first glance.  The White House uses the example of an incoming freshman who will save $4,000 under the president's plan:

If Congress fails to act, college will be further out of reach for millions of students and families.  In fact, an incoming freshman who borrows $27,000 over the next four years -- a typical debt incurred by today’s college graduates – is projected to pay over $4,000 dollars more over the life of their loans without the President’s proposal.

    However, the chart included with the plan shows that the average savings for student loan borrowers is actually $1,126.  Despite tweets from the White House that seem to suggest the savings are annual ("Last year, President Obama helped students save an average of $1,000 on their college loans"), the footnote to the chart explains that the savings assumes the borrower "repays the loans over the expected period of 12 years."  A savings of $1,126 over twelve years is $94 per year, or about 25¢ a day.


Note: This article first appeared at The Weekly Standard.

Note: Here's a post from last year's Don't Double My Rate campaign when the Obama administration used the same playbook, and Congress eventually signed on.

Student Loan Apples and Mortgage Loan Oranges

    For several months leading up to a July 1st deadline, the president's Twitter feed was filled with urgent warnings to followers to urge Congress to extend the interest rate reduction on Stafford student loans.  A few weeks ago, I wrote about the president's tendency for what Politico, in a case of anti-hyperbole, termed "hyperbole."  In reality, it was a blatant misstatement of fact, inflating the potential savings to students by a factor of eleven.  I didn't realize it at the time, but this deception had actually begun in April:

Incredibly, two months later, the president was using the same line, largely unchallenged.  The fact was that the $1,000 figure was the amount that a student loan holder would save over the life of the loan, generally 12 years.  The president's plan worked and Congress acquiesced rather than be blamed for sticking it to the poor students.

    Now that the president and Congress have saved certain student loan holders a whopping $7/month or 25¢/day, President Obama has turned his attention back to mortgage holders:

The president is harking back to a proposal he had set forth in February:

Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year.

Note that the annual savings claim is present again.  However, this time, there's actually something to it.    There is an example in the original proposal about how the savings are realized:

EXAMPLE: How Refinancing Can Benefit a Borrower With a Non-GSE Loan

 A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800.

 The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%).

 Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates.

 Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, which would reduce monthly payments by about $460 a month.

Reducing payments $460/month results in a cash flow savings of $5,520.  (Actual "savings" would be less; $272,000 at 6% for a year is $16,320; $272,000 at 4.25% for a year is $11,560; the interest savings is $4,760.  This is a rough calculation; the real savings would be less as the years go after taking the amortization of principal into account.) However, this example does not represent the "average" borrower.   The average balance on mortgages these days is about $155,000, not $272,000.
    So I have used this amount, $155,000, plus the current average rate borrowers are paying on outstanding mortgages (5.09% per the Commerce Department) and the current average 30-year fixed mortgage interest rate (3.53% per Freddie Mac.)  The above example then becomes a $176,000 mortgage taken out in 2005 at 5.09% with payments of $955 per month.  The principal balance is now $155,000.  Refinancing at 3.53% would yield a monthly payment of $696 per month, a reduction of $259 per month, or $3,108 over the course of a year.  Bingo!  The president's claim is correct!
    Sort of.  As I indicated above, there is a difference between cash flow "savings" and actual "savings."  Let's say you owe someone $500 and agree to pay them $100/year for 5 years.  Times are tough, so they agree to have you pay them back over 10 years at $50/year.  Your cash flow savings is $50/year, but in reality you have "saved" nothing - you still have to repay $1,000.  And if they are charging you interest, the longer term will actually cost you more.
    That is similar to what is going on here with the president's claim of a $3,000/year savings.  It's a cash flow savings.  Granted, that's what most people are interested in, and the benefit to household budgets in tough economic times would certainly be tangible.  But during the student loan debate, the emphasis (obscured as it was) was on total savings over the course of the loan, not the 25¢ per day.
    So what is the real savings for the average mortgage holder?  Under the original loan, $955/month for 30 years is $343,800.  Under the refinance, the mortgage holder pays $955/month for 7 years, or $80,220 (2005-2011).  Beginning in 2012, the payment is $696/month, but due to the refinance, the term of the loan now extends 30 years again, not just the 23 years left from the original mortgage term.  A payment of $696/month for 30 years is $250,560, plus the $80,220 already paid totals $330,780.  The difference after refinancing?  An actual dollar savings over the life of the loan of $13,020, or $434/year.  Still a savings, yes, but the mortgage holder is in debt seven years longer than before.  (Based on his $5 trillion increase in the national debt, long-term debt doesn't weigh heavily on the mind of the president.)

    I know, I know... I wrote the above and even I can barely follow it.  Accountants might be the only ones reading these words since non-accountants eyes probably glazed over several paragraphs ago.  But the bottom line is this: the president ignored and even distorted the 25¢ per day cash flow savings that was at stake during the student loan debate and used a trumped up "additional $1,000 in debt... per year" to sell his position.  Now that the immediate cash flow savings is truly significant, the president focuses there rather than the less attractive but comparable $1.19/day savings over the life of the refinanced mortgage.  Time and again, Barack Obama has shown he will stretch the truth or frame the facts in whatever way is most favorable to his positions.  And time and again, his opponents must call him on it.

Is Insourcing a Luxury?

    A recent DrudgeReport headline screamed:

OUTSOURCED IN SPACE: NASA ASTRONAUT ON RUSSIAN ROCKET

The headline linked to an Investors Business Daily website story about NASA's next astronaut heading into space:

Now, here's some real Obama outsourcing. 

This morning, Kazakhstan time, the next mission to the International Space Station successfully blasted off carrying the usual trio -- a Russian commander, an astronaut from the international community and an American in a seat rented by NASA since the retirement of the last U.S. space shuttle a year ago this month.

Given the Obama administration's recent criticism of Mitt Romney and Bain Capital as serial outsourcers, this story has more than a touch of irony.  However, the irony is sharpened by an Obama comment I unearthed recently during the student loan interest "Don'tDoubleMyRate" debate.  The president had stated that "Higher education cannot be a luxury reserved for the privileged few."  So I looked back at some other non-luxuries from past Obama statements and found this:

"And so, as President, I believe that space exploration is not a luxury, it’s not an afterthought in America’s quest for a brighter future -- it is an essential part of that quest."

So essential, in fact, that we must outsource the transportation for our space exploration to Russia?  Sort of like the Canadian-made bus that the Obama campaign got for the president?  I guess some luxuries are more luxurious than others.

Safe Quarters

    One of my first blog posts to garner attention was "Nickel and Diming" (thanks to Powerline, who listed it as a "Pick" back in January - it's still #3 on my popular posts list.)  That post was a commentary on how the administration made such a huge deal out of cutting the federal deficit by $3 billion, the equivalent of the average American family cutting out one Starbucks latte per year.  Well, they are at it again with a twist, and this time, the Republicans are helping them out.  But this time, it's not the government saving pocket change.  It's student loan recipients.
    The administration has been harping on the Stafford student loan interest rate increase that was due to take effect July 1st.  They have encouraged students and others, via the campaign blog and Twitter, to tell Congress "don't double my rate."  Well, Congress obliged and Friday, legislation was passed to hold the rate at 3.4% instead of 6.8%.  But as I wrote on the 24th, this rate cut (if it is renewed in perpetuity, a likely scenario) will save the average Stafford student loan recipient a whopping 25¢ a day.  So all you students who needed that extra 15 minutes a day on the parking meter, you can breathe easy.  The federal government is looking out for you.

Hyperbole on Steroids

    The president ramped up his efforts again this week to get Congress to prevent an interest rate increase on Stafford students loans set to occur on July 1st.  He also ramped up his deceptive rhetoric, as the White House blog records:

"If Congress does not get this done in a week, the average student with federal student loans will rack up an additional $1,000 in debt over the coming year," he said. "If Congress fails to act, more than 7 million students will suddenly be hit with the equivalent of a $1,000 tax hike. And that’s not something that you can afford right now."

The reality is that a rate increase would mean an additional $1,041 in interest over the 12-year life of the loan, not "over the coming year."  But Politico chose to report this whopper as follows:

That was a bit of hyperbole. According to the Department of Education, if rates double, the borrower paying back the average Stafford loan would owe an additional $1,041 over the 12-year life of the loan. That would break down to $87 more annually, or about $7 more a month.

"A bit of hyperbole"?  A $7 per month interest increase morphs into a annual "$1,000 tax hike", and that's "a bit of hyperbole"?  For crying out loud, it's 25¢ per day!  What's next?  Operation Fast and Furious is a "big fuss over a few guns"?  Four years of one-trillion-dollar-plus deficits is "austerity"?  With its recent fund raising appeals, this administration has already set its sights on rendering parody moot.  Now it's gunning for hyperbole, as well.  Why the Republicans are negotiating with the president about this issue and not ridiculing the whole matter from the rooftops is beyond me.