Student debt dings taxpayers

Doug Bandow

Politicians typically try to win votes by giving away money. That’s why there’s now a $1.2 trillion federal student loan program which, the New York Times politely observed, “has been removed from the norms and values of prudent lending.”

Federally subsidized student loans have become a political favorite, as Uncle Sam added $82 billion to his loan portfolio in 2015. An incredible 42 million Americans have outstanding debt; 6,100 schools have collected subsidized loans. Congress has created an educational “entitlement” akin to Medicare and Social Security.

A lot of that cash will never be repaid. Borrowers whose loans came due from 2010 through 2012 collectively owed more two years after they started repaying their loans. The New York Times profiled the incredible story of a teacher who graduated in 1994 with a student loan balance of $26,278 which has ballooned to more than $410,000.

As of 2014, 28 percent of those whose loans became due in 2009 were in default. Anticipated lifetime default rates for cohorts 2007 through 2011 steadily increase from 15.9 percent to 18.4 percent.

After shoveling out money to people with little credit to attend schools unlikely to prepare them for work that pays, Uncle Sam provides multiple outs from having to repay the loans. For instance, people are entitled to three periods of forbearance. Try that with your credit card.

The federal government also forgives loans for students who it believes to have been scammed in some sense by poor quality, typically for-profit, schools. But even in the case of flagrant fraud, why are the taxpayers responsible?

Congress also has created a forgiveness program for “public service,” which, of course, mostly means public, not service. Private jobs typically offer plenty of “service,” and the government often pays more — along with far greater job security—than private employers for similar “service.” Yet so far some 300,000 people have taken advantage of the program, with the number increasing dramatically over the last three years.

Yet the president and legislators constantly come up with new ways to sacrifice taxpayers to those who already enjoyed subsidized educational loans. Next year the “Pay As You Earn” program, passed by Congress but expanded via executive order, will cost Uncle Sam $22 billion in lost loan repayments. PAYE limits monthly payments to 10 percent of income and forgives the remaining debt after 20 years. (Why didn’t I get that for my mortgage?)

Sen. Elizabeth Warren, D-Mass., has pushed a $60 billion refinancing plan to reduce borrowers’ interest payments. We’re all already helping middle-class kids attend college. Shouldn’t they at least pay what they promised on their loans?

Publicly subsidized student loans, whether directly from Uncle Sam or through private banks backed by Washington, make no policy sense. The “social” benefit from education is greatest at the lowest levels, when people learn to read and write.

The “social” benefit of piling up bachelor degrees — especially in the soft social sciences — isn’t obvious. Even more so, advanced degrees primarily benefit individuals. It is perverse to force lower income people to finance professional degrees for those destined to be part of the one percent.

The federal student loan program illustrates how in Washington the taxpayers always lose. It’s time someone in government began to act in the interests of those who work and pay for everyone else.

Doug Bandow is a Senior Fellow at the Cato Institute.