Student loan redux

The student loan crisis is back in the news and will get much more attention now that the election is past.

The very real questions about the unsupportable rise in the cost of college, the amount of borrowing which occurs and the abysmally low graduation rates are still unanswered. Maybe they will get answered someday, right after Social Security is made solvent and Middle East peace occurs. Right.

Meanwhile, there is still $1.7 trillion outstanding in loan balances, most of which are non-performing in a traditional banker sense due to a federal decision to suspend payments during COVID. This is euphemistically called a “payment pause.” And COVID must still be here since payment obligations remain in abeyance, the political rationale being to blame the Supreme Court.

And maybe never for about 43,000,000 borrowers who are in line for $10,000 to 20,000 in forgiveness courtesy of Uncle Sugar, or should I say Uncle Joe. The pre-election announcement of this forgiveness was curious as to timing, but then we are a polity that expects the government to provide a full suite of “free” benefits so one really should not blame politicians for doing exactly as we demand.

Projections of the real cost of this forgiveness run from $300 billion to $500 billion and perhaps higher. Despite the voodoo economics emanating from our current financial masters in Washington, it is real money that must come from somewhere. I suspect the dollar printing press is going to overheat.

If you think I am being uncharitable in my characterization of federal accounting practices, consider this. When the Obama administration determined to federalize student loan originations in 2010, we were assured this would result in a $114 profit over the next 25 years. Why would they think this? Previous to the federal usurpation of student lending, commercial banks were making the loans and, no surprise here, making profits on that business line.

So the government federalized a profitable program with visions of sugarplum profits dancing in its head. Instead, the Government Accounting Office found the program generated a loss of $197 billion. That’s a mere $311 billion mistake. Even Everett Dirksen of “a billion here, a billion there and pretty soon you’re talking real money” fame would see that as significant.

This should be an object lesson for any proposal to have the federal government do what can be or is being done in the private sector. Don’t count on the lesson being learned.

The economics of this is horrendous, even before the government determined to “pause” collection activities. But this is more of an ethical issue than an accounting one. It’s not just about the Benjamins.

The cardinal rule of government programs is to pick winners and losers. They can’t give all these bennies to everyone so some get a check and the rest are handed the bill. Think about all of those who won’t receive this benefit: Those who paid off their loans, those who attended less expensive colleges to avoid borrowing and those who never attended college. Suffice it to say they are not happy campers.

I have the good fortune of retaining connection in retirement to my former profession. I began my career in higher education administration in student financial aid during an era when student loans were private arrangements between a bank and a student.

Eventually, the federal government expanded the program to cover all students and provided the necessary incentives for banks to lend to young people with no credit history. That’s a story for another day, but it worked, at least in terms of federal policy to make college appear affordable to all who wished to pursue post-high school degrees.

Last week, I attended the monthly meeting of financial aid professionals from colleges in northeast Indiana. Much of the discussion centered on the administrative nightmare they live through daily as federal “guidance” on this is typically byzantine. Disruption, now as back in my financial aid days, is the watchword for federal program administration.

I asked the group about the ethical aspects of the forgiveness offer. They found it abhorrent. Their reasons were the same as I hear everywhere. The descriptors I’ve heard run from political pandering to poor policy to outrageously unfair.

And so we are back to the economics. One thing any student in Econ 101 learns is that people respond to incentives. What is the incentive here? Financial aid professionals will tell you the incentive is to borrow excessively and depend on some future administration to forgive it all.

A colleague at the Indiana Policy Review once wrote that governmental borrowing is the ultimate case of taxation without representation. We borrow the money today and our children and grandchildren will be taxed to redeem the government bonds tomorrow.

That’s where economics and ethics intersect. Or should I say collide head-on?

Mark Franke, an adjunct scholar of the Indiana Policy Review and its book reviewer, is formerly an associate vice chancellor at Indiana University-Purdue University Fort Wayne. Send comments to [email protected]