Bad Policies Have Consequences

On Friday, Investor’s Business Daily posted an article about the results of the government’s takeover of the student loan program. The results of that takeover have not been good.

The article reports:

A report from the Department of Education notes that the net cost of the federal government‘s direct loan program is quickly heading into the red. This program, mind you, was supposed to be a moneymaker for the government, as students paid back federal loans with interest.

But as it turns out, borrowers have been flocking toward various loan forgiveness programs, by which the government will lose money, erasing gains from other loans. The report shows that the direct loan program went from a $25 billion surplus in 2012 to less than $5 billion by 2015.

A separate report says that this program ran a $36 billion deficit last year, up from $8.4 billion in 2016.

One of the problems with the government’s takeover of the student loan program is that the government did not have any interest in limiting the loans to people who might be willing and able to pay them back. When the program was privately granted, banks had an incentive to use good business practices in granting student loans–in order to stay in business, the banks needed the people borrowing the money to pay it back. This is another example of the private sector being able to do something better than the government.

The article concludes:

One program, called “income-driven repayment,” lets borrowers avoid payments if their income falls below a certain threshold, and then caps payments as a percentage of total family income. Any debt left over at the end of 25 years is forgiven.

Not surprisingly, students flocked to these and other programs that let them avoid paying back all their loans, even though the interest rates they had to pay were already subsidized.

Between 2011 and 2015, the portion of loans being repaid through these IDR plans shot up 625%, according to the report.

The direct lending program even earned the nickname “Obama Student Loan Forgiveness,” and surveys of student borrowers by LendEDU found that half of them don’t expect to have to pay back all their debts because the federal government would forgive them.

The rising expectation that loans wouldn’t have to be paid back in full also had the perverse effect of making students increasingly indifferent to college costs, thereby fueling tuition inflation.

As the Education report says, “Decision makers and others may not be aware of the growth in the participation in these IDR plans and loan forgiveness programs and the resulting additional costs.”

Given the $1 trillion in loan debt on the federal books, one hopes that awareness comes soon. Otherwise, the student loan program will quickly turn into one of the most regressive taxes on the books.

This is one example of the need to shrink the government. Taking over a program that has been run successfully in the private sector and moving it to government control is simply not wise. Free market capitalism is always the best way to run anything.

What Happens When The Government Makes Something Better

Investor’s Business Daily posted an article about what has happened to student loans under the Obama Administration.

This is the picture:

The Obama Administration took over the student loan program in 2010.

The article reports:

In a nutshell, federal loan aid to colleges is pushing up tuition faster than inflation. Students must take out ever higher amounts of debt to pay for their education, but starting salaries haven’t kept up. If students don’t get good jobs when they graduate, many will default.

The study, published by the National Bureau of Economic Research, shows conclusively that growth in one program — the Federal Student Loan Program — was more than enough to account for the entire rise in college tuition from 1987 to 2010 — a stunning conclusion that suggests a massive market failure.

From 2006 to today, total student loan debt soared from $517 billion to $1.3 trillion, a 152% jump, to cover surging tuition costs. Over that same period, real starting wages for college grads were essentially flat.

Sadly, this should be no surprise, given recent history.

Whenever government gets involved in subsidizing anything — from sugar to home mortgages — higher prices emerge, leading to market disruptions and, often, a “crisis.”

At some point, we need to realize that the private sector does a better job at everything than the government. The bubble of the student loan debt will be bailed out by the taxpayers, and the national debt will continue to spiral out of control. This is our future unless we begin to elect people who understand both human nature and free markets.

Then and Now

From the Daily Caller in January 2011:

Harry Reid on raising the debt ceiling in 2006:

“If my Republican friends believe that increasing our debt by almost $800 billion today and more than $3 trillion over the last five years is the right thing to do, they should be upfront about it. They should explain why they think more debt is good for the economy.

From The Hill yesterday:

Senate Majority Leader Harry Reid (D-Nev.) is moving legislation to push the debt limit until Dec. 31, 2014, well beyond next year’s midterm election.

Senate aides estimate the bill would increase federal borrowing authority by about $1.1 trillion.

Is there any doubt that this whole discussion is based on politics and not based on what is good for America and Americans? Until we vote professional politicians out of office, this is the kind of nonsense we will have to live with.

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Consequences Of Some Small Print In ObamaCare

CNS News reported today that the U. S. Treasury has released data stating that the outstanding balance for all of the direct student loans the federal government has issued topped $600 billion in April.

The article reports:

In January 2009, when Obama was inaugurated, the balance was $119.803 billion and has since increased more than fivefold.

The $480.654 billion increase since January 2009 in what is owed to the Treasury in direct student loans represents a climb of about 250 percent in just over four years.

What happened?

The article explains:

Before Obama’s first term, federally guaranteed student loans were made both by the government directly and by private lenders using their own capital through what was called the Federal Family Education Loan program. Language inserted into the the Obamacare law signed in March 2010, however, abolished the latter type of federally guaranteed student loan, giving the U.S. Treasury a monopoly over those loans.

As the Congressional Research Service has described it, this Obamacare provision made the U.S. Treasury the exclusive “banker” for federally guaranteed student loans. Thus, U.S. taxpayers essentially own these loans.

This is the housing bubble played out in student loans. The American taxpayer is the lender in these loans.

The article reminds us:

If the students who have borrowed the current outstanding balance of $600 billion in federal direct student loans default on those loans–or if Congress forgives them their debts–the burden of that $600 billion loss will fall on U.S. taxpayers.

This is not pocket change. This could well be our next financial crisis.

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Another Cost Of Runaway Spending

CNS News is reporting today that the amount of the U. S. Government debt held by the Federal Reserve has increased by 257 percent since President Barack Obama was first inaugurated on Jan. 20, 2009, and the Fed is currently the single largest holder of U.S. government debt.

The article reports:

Since Obama has been president, the publicly held portion of the U.S. government debt (as opposed to the “intragovernmental” debt the government has borrowed from federal trust funds such as the Social Security Trust Fund) has increased by  $5,264,245,866,257.40. The $.221369 in additional U.S. government debt the Fed has purchased during Obama’s presidency equals 23 percent of all the new publicly held debt the Treasury has issued during that time.

Please read that again. That paragraph refers to the fact that the government has borrowed from federal trust funds such as the Social Security Trust Fund. Remember, this is the government that is referring to Social Security as an entitlement. I don’t think I am too far off base when I say that the way the government has handled the Social Security Trust Fund should convince us that we should give the government as little of our money as possible–they did not handle money well.

Unless we elect people who are willing to curb Washington’s runaway spending, our nation will be bankrupt by the time the next president takes office.