Student loan forgiveness sounds benevolent; but not only does it not solve the inherent bubble problem, it inflates it further at taxpayer expense.
November 23, 2020
By: Bobby Casey, Managing Director GWP
It’s not a betrayal of anything to be intellectually honest about these things. In fact, a true hallmark of patriotism is to be critical of policy both past and present. As children, we’re often taught history in silos rather than as a timeline with cause and effect.
I was taught that the first and second world wars were two independent events. They weren’t, but by teaching it this way, people don’t learn the lessons of history because they don’t learn the cause and effect.
The truth is, the problems the US and other nations are having aren’t from acting politicians. These problems are from politicians who are long gone and dead.
In 1965, under Lyndon Johnson, the Federal Family Education Loan program started. President Johnson has been dead since 1973, yet 55 years later is when we see the moral hazards unfold.
One of the big policy issues the left is calling on Biden to implement in his first hundred days is student loan forgiveness… even if by Executive Order.
If we learned absolutely nothing from Obama and Trump, it’s that executive orders only mean something while there’s a president who wants it in office. Lest we forget about DACA (Deferred Action for Childhood Arrivals), where President Barack Obama, by executive order, granted two years deferred deportation and eligibility for legal work permits in the United States.
President Trump would later undo that order by his own executive order.
And this is the problem with executive orders. A President Biden can offer a reprieve in government loans, perhaps, but without the permanence of a law to back it up, it could just as easily be revoked by the next administration. That could mean compounded interest on what was thought to be a forgiven amount.
The true severity of this problem is hardly acknowledged in the mainstream media. In fact, there’s a greater focus on the fact that this poor 24 year old can’t afford their own two-bedroom apartment because they are saddled with tens of thousands of dollars in student loan debt and only have a Humanities degree to show for it.
That’s not a tragedy. That’s a life lesson.
The tragedy is that this debt crisis is about to exceed that of the last sub-prime lending crisis the US saw in 2008:
[A]ccording to a new analysis from the Education Department and two private consultants, taxpayers may be on the hook for $435 billion, according to documents reviewed by the Wall Street Journal.
Looking at $1.37 trillion in student loans held by the government, an estimated $935 billion in principle and interest will be paid back by borrowers, leaving $435 billion in potential losses – an amount which doesn’t include $150 billion in student loans originated by private lenders.
The losses, which are “far steeper than prior government projections,” could eclipse the $535 billion in subprime losses during the 2008 financial crisis (a figure arrived at by Moody’s Mark Zandi). The difference of course is that the government can simply borrow trillions of dollars at ultra-low interest rates to absorb the losses – so taxpayers will still be on the hook…
How is this possible? After all, even bankruptcy won’t get you out of paying these back. So how can anyone other than the borrowers be on the hook?
Because we already dipped our toe in the loan forgiveness pool:
[I]ncome-based repayment programs are a major driver of projected losses – as many students who rack up massive student loans then jump into income-based repayment programs. On average, 51% of balances are repaid with income-driven programs, while borrowers in other plans will repay 80%, according to the report.
There are varying income-based repayment programs, but they all cap payments to between 10% and 20% of your discretionary income. This is calculated as adjusted gross income, less 150% of the federal poverty line. The remaining loan balance after 20 or 25 years of payments is forgiven.
Along with confirming each year that they still qualify for the program, individuals also pay more in interest and must pay taxes on the forgiven amount.
This small experiment in loan forgiveness is already putting $435 billion on the shoulders of taxpayers. Imagine anything beyond this. The idea floated by the Biden camp is $10,000 per borrower in forgiveness.
It’s uncomfortable to think that the guy who decided to get a tech certification through Coursera for a fraction of the cost of a full bachelor’s degree will now be responsible for paying for the Art History degree of a woke barista.
And while it sounds merciful to bail out the borrowers, it will ultimately have the same effect as panhandling. Yes, it abates the immediate hardship, but it utterly fails to solve the root problem behind this bubble.
The seemingly endless faucet of funding has universities jacking up tuition, just because they can. Loan forgiveness will only worsen this trend as it seeks to absolve not only the institutions but now the borrowers from any sort of financial responsibility.
Moreover, not only is there no distinction in price for the type of degree, lenders aren’t screening the earning potential behind the degree before offering funding.
A degree in Women’s Studies isn’t worth the same as a degree in Molecular Biology, because the former would never yield an income equal to that of the latter. Yet the tuition is the same.
Loan forgiveness notwithstanding, the crisis remains until student loans undergo the same level of scrutiny as a mortgage. This is essentially sub-prime lending as the borrowers have no credit, no collateral, no income, and no assets to their names, yet seek out tens if not hundreds of thousands of dollars in funding.
The correction during the sub-prime financial crisis in 2008 was stricter lending requirements. It makes sense that this would likewise be the solution for student loans.
Business plans with greater earning potential are being denied funding, while the federal government cosigns wokeness in the taxpayers’ names.
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