Government program to decrease student loan debt only encourages it

I am shocked — shocked, I tell you! — to learn a government program to make it easier for college graduates to handle their student-loan debts instead seems to be sparking more borrowing, higher tuition and a growing liability for taxpayers.

It’s almost as if removing disincentives for people to think about the money they borrow and its consequences has the effect of … making them borrow more money as if there aren’t as many consequences. From the Wall Street Journal:

Government officials are trying to rein in increasingly popular federal programs that forgive some student debt, amid rising concerns over the plans’ costs and the possibility they could encourage colleges to push tuition even higher.

Enrollment in the plans — which allow students to rack up big debts and then forgive the unpaid balance after a set period — has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion, U.S. Education Department records show.

The popularity of the programs comes as top law schools are now advertising their own plans that offer to cover a graduate’s federal loan repayments until outstanding debt is forgiven. The school aid opens the way for free or greatly subsidized degrees at taxpayer expense.

As a chart at the original article shows, the program has grown by about 370,000 borrowers and almost $20 billion in loans just since last fall. That’s in large part because loan payments are restricted by the borrower’s earnings — just 10 percent per year of income above 150 percent of the federal poverty level, which this year would mean monthly payments of about $270 for a single person earning $50,000 — and the debt is forgiven entirely at some point. That point is after 10 years for people employed by the government or a non-profit, or 20 years for someone working in the for-profit private sector.

So, a person who works in the public sector for 10 years after graduation, earning an average of $50,000 a year, could have his debt charged to taxpayers after paying about $32,000 — no matter how large the debt was. Do you think that might remove a reason for the student to think about the difference between borrowing $32,000 versus, say, $100,000?

Here’s the bottom line for taxpayers and future student borrowers, according to the WSJ article:

“A report Monday last week from the Brookings Institution, a centrist think tank, offered one of the few preliminary examinations of the programs’ impact. The most popular plan could cost taxpayers $14 billion a year if it becomes available to all borrowers as [President] Obama has proposed, while fueling tuition inflation, it said.

” ‘Loan forgiveness creates incentives for students to borrow too much to attend college, potentially contributing to rising college prices for everyone,’ the study said. The authors recommend scrapping the forgiveness provisions.”

That bit about “potentially contributing to rising college prices for everyone” is the worst news, as bad as $14 billion a year in additional public spending would be. Just like in health care,increasing the amount of public subsidy is not going to bring down the cost of the underlying service; if anything, we should expect the cost to rise. That makes it harder and harder for lower-income Americans to pay for the service — be it health care or higher education — and, perversely, spurs more calls for government subsidies. That cycle is bound to be a vicious, not virtuous, one.

Read more at The Atlanta Journal-Constitution 


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