WASHINGTON, DC – DECEMBER 12: U.S. Secretary of Education Betsy DeVos testifies during a hearing … [+]
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Secretary of Education Betsy DeVos took some heat this week for comments she made about cancelling student loans and “free” college tuition. Speaking at the annual Federal Student Aid Training Conference (FSATC), she had this to say about cancelling student debt and “free” tuition:
“We’ve heard shrill calls to cancel, to forgive, to make it all free. Any innocuous label out there can’t obfuscate what it really is: Wrong.”
She made several arguments to support her position:
- “More than two-thirds of Americans don’t pursue a four-year college education. … It’s fundamentally unfair to ask two-thirds of Americans who don’t go to college to pay the bills for the mere one-third who do.”
- “And it’s even more unfair to those who have held up their end of the bargain and paid back their student loans themselves to subsidize those who don’t save, plan, and pay.”
- “Ultimately nothing is free. Somebody, somewhere pays the bill.”
Depending on your political views, you either give these arguments a hearty “Amen!” or ask what a billionaire would know about the hardship of student debt.
What we shouldn’t do, however, is lose sight of just how we got into this mess in the first place.
2010 Government Takeover of Student Loans
The year was 2010, and the Obama Administration and a Democratically controlled Congress had just passed the Affordable Care Act. As part of the legislation, they also made a major change to federal student loans. To understand the change they made, we need to go back to 1993.
In 1993, the Clinton administration introduced direct federal lending. Before that time, loans were issued by financial institutions and guaranteed by the federal government. Now student loans could be accessed directly from the federal government. Until 2010, however, the number of federal direct student loans remained stable.
The 2010 legislation changed this system. It removed financial institutions from the equation. Going forward, students would borrow directly from the federal government. In short, it was a government takeover of a vast student loan industry.
Projected Savings
At the time promises were made about taxpayer savings. Many said that by taking out the middleman—financial institutions—the government could redirect billions in profits back into education.
As an aside, this is always the argument for any government takeover. Remove the profit from private industry and give it to the people. It rarely works as planned, and the Obama administration’s student loan takeover is Exhibit A.
At the time, the Congressional Budget Office projected that the program would save $61 billion over 10 years. Most of this projected savings would go back into education, including Pell grants. At least, that was the plan.
Helped Pay for Obamacare
The takeover of federal student loans was also designed to help fund Obamacare. DeVos made this point in 2017, which the Chronicle of Higher Education labeled as false. Yet a 2010 New York Times article confirms the connection:
“In addition, to comply with the complex budget reconciliation rules, some of the savings from the education changes had to be redirected to pay for parts of the health care legislation.”
Of course, with all of the alleged savings the plan would create, few questioned this shell game at the time.
More Generous Loan Forgiveness
At the same time, the legislation expanded the loan forgiveness program. For loans taken out after July 1, 2014, income contingent repayment programs required borrowers to pay just 10% of their discretionary income (down from 15%). After 20 years (down from 25 years), any outstanding debt would be forgiven.
Federal Loan Losses Explode
With the benefit of hindsight, we now know that the promised cost savings never materialized. Even worse, billions of taxpayer dollars will be lost to the program while the number of direct student loans have grown.
As early as 2015 the CBO “revised” its estimate from a cost savings to a cost of $27 billion. Of course, that amount is peanuts in a world where a $908 billion stimulus proposal is characterized as nothing more than a “down payment.” Unfortunately, the problem is now much worse.
As reported by the WSJ, the federal government now stands to lose $435 billion on a program that was promised to save us $61 billion. As the WSJ noted, after “decades of no-questions-asked lending, the government is realizing that it has a pile of toxic debt on its books.”
Calls to Forgive Student Loans to “Solve” the Crisis
Having planted the seeds of our current crises ten years ago, some democrats have a “solution.” Senators Chuck Schumer and Elizabeth Warren are urging President-elect Biden to forgive up to $50,000 in student loans. While Biden has resisted their proposal so far, he has proposed forgiving $10,000 in student debt.
These proposals hide the real causes of the crises. Under the current program, no effort is made to evaluate the credit worthiness of the borrower or their ability to pay. A mortgage company that took this approach would be in violation of federal ability-to-pay rules. There is also no evaluation of the student’s expected major or projected income. Add to these common sense safeguards a generous loan forgiveness program and the current crisis shouldn’t be a surprise.
The real question is whether we should trust those who created the crises to solve it.
