Student Loan Update: The 21 Billion Dollar Misunderstanding

The President wants to make college more affordable for Americans, but he's teaching a lesson of irresponsibility for student loan borrowers that sets back taxpayers by billions of dollars.

The Obama Administration's student loan program came up $21.8 billion short of projections, according to figures buried deep within his own budget proposal. This is the largest budget shortfall for any government credit program.

The cause for the shortfall is the President’s policies that ostensibly were meant to ease repayments for borrowers. His program has been two-pronged: reducing monthly payments for borrowers to just 10 percent of their income and expanding the loan forgiveness program for those who take jobs in the public secret after a decade of steady payments. These are not new programs but they were expanded under the Obama-Biden higher-ed scheme as a carrot for support among young voters.  

Some 40 million Americans are straddled with $1.2 trillion of student loan debt. That is bigger than national economies of a number of countries.) And it's growing as parents and students take on more debt to pay the ever-rising costs of higher education. A big driver of higher-ed costs is federally-backed student loans themselves. Direct government loans increased 44 percent over the last two years alone. So colleges and universities have no incentive to control or reduce the costs of delivering education and the educational experience if they know the government will step in and give borrowers exactly what the ask for.

The President's policies may have been well-meaning, but we see what happens when good intentions, coupled with a misunderstanding of economics, lead to bad policy.

Politico reports: 

The main cause of the shortfall was President Barack Obama’s recent efforts to provide relief for borrowers drowning in student debt, reforms that have already begun to reduce loan payments to the government. For more than two decades, budget analysts have recalculated the projected costs of about 120 credit programs every year, but they have never lowered their expectations of repayments this dramatically. The $21.8 billion revision—larger than the annual budget for NASA, or the Interior Department and EPA combined—will be tacked onto the federal deficit.

“Wow,” marveled Steve Ellis, vice president of Taxpayers for Common Sense. “Whether or not it’s good policy to help borrowers with their payments, it’s obviously costly for taxpayers.”

…

Student loan defaults increased somewhat last year, but the department says the primary drivers of the unprecedented “re-estimate”—budget-wonk jargon for the update of expected loan costs—were Obama’s policy changes, the recent ones as well as the upcoming ones. And because of a quirk in the budget process for credit programs, the department can add the $21.8 billion to the deficit automatically, without seeking appropriations or even approval from Congress.

That’s a big quasi-bailout, increasing the deficit nearly 5 percent.

…

It’s not yet clear whether this will be a hefty one-time revision, or a harbinger of oceans of red ink as millions more borrowers get relief on their payments to the government. Several reports by Barclays Capital have warned that Obama’s generosity to borrowers could leave the student loan program as much as $250 billion in the hole over the next decade.

This news is especially critical now that the President wants $60 billion to expand access to community college by granting two years for free the C-level students or better. While that plan is different from loan forgiveness, it’s another example of educational engineering at the expense of taxpayers and with little emphasis on responsibility or the content of the education being delivered.

Similar to government policies that fueled the home-buying craze which landed our economy in the hot water we’re still recovering from, boosting access to cheap student loans with no expectations set for repayment or overly generous forgiveness is rendering a strategy meant to earn brownie points with young people harmful to both them and the public at large. It’s not the reform we need, and it sets our students up for greater hardship when they get out of school. Simply waving a wand and forgiving debt does not erase the debt. It just moves the red figures from one account holder to another. There is no such thing as free education, and the President needs to stop trying to peddle his kind, but irresponsible higher education policies as such.