I am tutoring a 16 year-old boy named Billy in Algebra and a few other subjects as well. Each month, I send Billy’s school counselor an update on his progress and I report his recent test scores. I recently reported to his counselor that, over the past 3 months, Billy has improved his test scores by approximately 10% each month.
“That’s fantastic,” his counselor exclaimed!
“Yes,” I responded, “but, it depends how you look at it.”
In April, Billy received a 50 out of 100. In May, Billy received a 55 out of 100. In June, Billy received a 61 out of 100.
“While Billy’s test scores are visibly improving, he is still failing miserably. His mother neglects him and his father abuses him. He doesn’t have any role models to look up to. He, single-handedly, provides for his 4 siblings by working 2 part-time jobs.”
Are things improving? Sure. But, this path is unsustainable.
Although Billy is a fictitious character, he resembles many young Americans. Equally concerning, he also resembles the American economy.
The Current Health of the Economy
I recently wrote a 2nd Quarter Review and Economic Outlook with an optimistic tone. The article was filled with economic indicators and statistics which, when expressed relative to prior months, can be extremely misleading (much like the 10% monthly increase in Billy’s test scores). The biggest question was whether or not the Federal Reserve will continue it’s stimulus because this is what most financial writers and investors are focused on.
To Taper or Not to Taper? It doesn’t matter.
Much like our 16 year-old Billy, our economy is failing miserably. Rather than treating the problem, we are arguing over how to cure the symptoms. The problem goes unnoticed.
The best example of this is the doubling of student loan interest rates.
Who cares that America’s educational system is broken? Who cares that excess demand for college degrees has caused tuition prices to soar? Who cares that college graduates can only find jobs that they could have fulfilled in high school? Who cares that our government is excessively taxing and regulating the very businesses that are supposed to hire these graduates?
Who cares about all of our systemic problems? Let’s talk about rates!
Student Loan Interest Rates Have Doubled
I cannot think of a more insignificant “problem” than the doubling of Federally Subsidized Stafford loan interest rates. Here are a few things to consider before reading my next article:
1. From 2006-2008 the interest rate was 6.8%. It was then temporarily reduced over the next few years to a rate of 3.4%. It’s much less dramatic to report “Interest Rates Are Returning To Where They Were” versus “Interest Rates Have Doubled!” Doubling is not a big deal if something is first cut in half.
2. I pay an interest rate of 6.8% on my student loan and I’m doing fine. Is it so preposterous to ask a 2017 graduate to pay the same interest rate as a 2008 graduate? It doesn’t seem that crazy to me.
3. The “horrific” doubling of Federally Subsidized Stafford loan interest rates affects very few people. There is an unimaginable $1 Trillion of outstanding student loans and this will affect 0% of that $1 Trillion. It will only affect roughly 25% of NEW LOANS originated.
The doubling of rates is not a problem.
The Real Problem Is That No One Recognizes The Real Problem
To Be Continued…