Student Loans for Toddlers?

New York City mayoral candidate Christine Quinn has created a new program to help the middle class pay for expensive day care by offering student loans. In a column titled “Owe, Baby, NYC”, The New York Post describes this “first of its kind” pilot project:

The program…allows Neighborhood Trust Financial Partners, a local credit union, to offer 6-percent-interest loans through a $300,000 city subsidy. Families with children between the ages of 2 and 4 can get loans up to $11,000. In the first year, they’ll be available to 40 eligible families….New York City has some of the highest child-care costs in the country, averaging $13,000 per year, according to the Center for Children’s Initiatives. Applicants must have an annual income of $80,000 to $200,000, a credit score of at least 620 and agree to attend a free financial counseling session with a Neighborhood Trust counselor. Once parents are approved, the payments will be disbursed directly to the day-care providers. The program also allows parents to make interest-only payments until their children reach kindergarten-eligible age.

This is a surprising development given the current national discussion about college student loans. According to a study by the federal government’s Consumer Financial Protection Bureau there is $1.2 trillion in outstanding student loans ($1 trillion through the federal government). Currently 1 out of 8 student loan borrowers is in default.

Given these statistics is it wise to extend student loans to the parents of toddlers? Matthew Yglesias of Slate says no.  He differentiates college and preschool loans in the following way:

Perhaps the best way to understand the problems here is to start with the deep logic behind student loans for college. College is expensive, and difficulty paying the tuition bill can be a major barrier to attending or completing college. Yet completing college appears to be quite financially rewarding, with degree-holders earning a lot more money over the course of their lives than those who don’t have a college degree. So it’s a very natural situation for a credit market to arise. Having the money to cover your college tuition makes you much more likely to be able to repay the loan in the future….

Day care lending, meanwhile, has basically none of the features that make college tuition loans seem attractive. Being able to get a loan for your 3-year-old to get some child care doesn’t in any clear way increase your income three, five, or 10 years down the road. For lots of hard-pressed New York families, a loan like this is going to be a great lifeline out of a difficult situation. But down the road, you’re going to end up with a new set of difficult situations as people struggle to repay the loans.

Ultimately the voters of New York City will decide on the wisdom of City Council Speaker Quinn’s plan when they vote for mayor.

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