Economy EducationWritten by Havre On 22 May 2012
Student Loan Interest Rate Increase Can Affect Hawaii

This July, student loan rates will double from 3.4 percent to 6.8 percent annually unless Congress agrees to extend the current rate for another year. As we are in the midst of graduation season, we are reminded of the reach here at home and the implications that will arise from an increase.

Just this spring we are seeing 2,000 students graduating from the University of Hawaii at Manoa (1,200 undergrads and 800 advanced degrees), not to mention UH-Hilo, UH-Maui and its community colleges. At the private universities they are graduating a record number of students; Hawaii Pacific University is awarding 850 degrees, most in its history; Chaminade over 500, up 25 percent; and BYU Hawaii is also graduating a record number of its 2,500 total students.

On May 8,2012, it is estimated that student debt in this country hit $1 trillion dollars, with the average student graduating with approximately $25,000 in debt. Those going to private universities, especially the Ivy League schools, are graduating with debt exceeding $200,000.

So what’s the hang-up? Congress is debating on how to cover the $6 billion estimated price tag for keeping the interest rate low and it’s not pretty. One side of the aisle wants to increase taxes on the “more fortunate” and the other wants to take away preventative health care programs. The reality is that if it is not extended, not only will the indebted students be whacked, but also the economy in general. The demographics of those saddled with student debt generally live paycheck-to-paycheck, and any increase in debt service will just be that much less that they will have to spend on day-to-day necessities. (Remember that 70 percent of our economy is consumer spending.)

The other issue arising, as reported by Bloomberg, is that universities stand to get hurt from any downturn in enrollment, i.e. revenues. Bloomberg reports that 31 percent of the institutions in its database are considered “inadequate-capital institutions,” due to their high level of debt to cash-on-hand. On the other side, there are only 14 percent that are considered “adequate-capital institutions,” putting additional stress on our weakened educational system.

This issue goes beyond politics and needs to be resolved before more damage is done. $6 billion is a drop in the bucket on a national scale with the future of higher education so important to our future growth and quality of life.

On a side note, the State of Hawaii had invested approximately $1 billion in auction-rate securities (ARS) backed by student loans before the financial crisis. Those securities quickly became “illiquid” when the bottom fell out. Last I heard they still have about $800 million in its portfolio.

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Havre

Randy Havre has a wealth of experience in the financial industry. In 1987, he established his own full-service stock brokerage firm, which was also registered with the SEC as an Investment Advisory Firm, managing money for the State of Hawaii’s pension fund, among other portfolios. In 1994, he started his first of three Hawaii based Venture Capital Funds. Additionally, he wrote a weekly stock column in the Pacific Business News for 21 years, taught Finance 315 Portfolio Management and Investment Strategies at the University of Hawaii for five years and is on KHON’s Morning News as a business/financial analysis twice weekly. Over the past nine years, Havre has been active in South America doing business development work for some of his portfolio companies, mentoring entrepreneurs and advising investors.

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