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.