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.

As Student Loan Debt Increases…

On Sunday, The Attleboro Sun Chronicle posted an editorial about the ‘perks’ many of our college-level administrators and teachers receive. As more money becomes available for student loans, colleges have no reason to cut their costs or seriously consider how they spend their money. The Sun Chronicle pointed out some of the things currently impacting the cost of a college education.

The article reports:

Massachusetts state university costs students around $9,000 a year, or 24 percent less than the average New England private university.

But that could be changing, putting the economic future of many Massachusetts citizens – and the fiscal future of the state as a whole – in jeopardy.

As an example, at Bridgewater State University, which draws scores of undergraduates from the local area, students face a potential $700 increase in student fees next fall, the largest hike since 2007.

Bridgewater State’s board of trustees is already projecting a 4 percent reduction in department budgets alongside the increase in fees, as Sun Chronicle correspondent Kayla Canne noted in an April 9 story.

Since 2007, the state’s Department of Higher Education says, tuition and fees at Bridgewater gradually increased from $5,866 to $8,928.

Part of this is due to the failure of the Legislature to fully fund the state’s higher education budget, particularly the $8 million in union contracts that universities have negotiated with faculty and staff.

But it also makes it all the harder to justify the perks of office handed out to top university administrators.

Dana Mohler-Faria, Bridgewater’s ex-president, cashed in his unused sick and vacation time for a one-time payment of $269,984, accepted a $183,421 annual pension in addition to an annual $100,000 consulting contract with the school. (Mohler-Faria eventually gave up the consulting contract after facing criticism.) His perks were hardly unique, however. A recent story in The Sun Chronicle by the New England Center for Investigative Reporting revealed that presidents and other top administrators at public colleges and universities are provided houses, cars, free tuition for their spouses and children, country club dues and other perks. Some are eligible for bonuses of up to $201,000 per year.

Might some of this be responsible for the high cost of a college education? When you consider that the government took over the student loan program during the Obama Administration, leaving the taxpayers on the hook for defaults on college loans, the cost of a college education becomes important to everyone. It’s time for colleges to look at their budgets and consider how they are spending their money.

 

A Picture Is Worth A Thousand Words

Zero Hedge has posted nine charts that clearly show what President Obama’s economic policies have done to the American economy and those of us who try to exist in it.

Here are the charts:

EconomicCharts2015

If you follow the link above to the site, you can make the charts larger. It really is not a pretty picture.

The Next Government-Caused Financial Disaster

The Wall Street Journal has two stories in its opinion section about what is happening to student loans–the first is entitled, “Your Taxpayer Tuition Bill,” and the second is entitled, “The Hidden Student-Debt Bomb.” As you know, the federal government took over the student-loan market in 2010. The Department of Education now stands behind over $1 trillion in outstanding debt.

The first article explains:

Less well known is how the same federal government that has promoted and subsidized this debt is also scheming to make sure it doesn’t have to be repaid.

Jason Delisle of the New America Foundation has the story in a nearby op-ed. Even as the debt-level rises and the economy improves, the feds are promoting loan forbearance and forgiveness programs.

The first article explains that graduates who choose nonprofit or government jobs an have their loans forgiven entirely after 10 years.

The first article points out:

Two years ago the Administration’s estimate of the average amount to be forgiven in income-based repayment plans was already $41,000 per borrower. The total amount of forbearance loans is $125 billion, and rising. And even with all of these ways to avoid on-time repayment, borrowers are still defaulting at a rate of nearly 20%. The clear danger is that hundreds of billions of dollars will never be repaid, which means that future taxpayers will have to pick up the tab.

Now on to the second article. The problem with the government taking over student loans is that a large percentage of them will not be repaid–leaving the taxpayers to pay the bill. Conveniently, the bill will be due after President Obama leaves office.

The second article illustrates the trend:

Despite more borrowers taking advantage of benefits to suspend and lower their payments, the share of borrowers in default is still trending upward. It now stands at 19.8% of borrowers whose loans have come due—some 7.1 million borrowers with $103 billion in outstanding balances. That’s the highest share since the Education Department began making the statistic available in 2013, and given other trends, it probably is a record high.

These trends are troubling because the U.S. economy has been improving for some time. Yet fewer and fewer borrowers are repaying their federal student loans. For those who do make payments, more of them are paying too little to retire the debt they took on.

This all makes sense, however, when you realize that the student-loan program has been designed to achieve two political goals: Loans should be available to any student, at any school, pursuing any credential; and student debt is bad and burdensome, so it should be easy for borrowers not to repay.

Based on these goals, the program is performing quite well for students and the institutions whose coffers swell under such loose lending standards. Loan issuance has grown rapidly in recent years while repayment rates have declined steadily. From the perspective of the taxpayers who must ultimately finance these liabilities, however, the federal student-loan program is performing badly and steadily getting worse.

There are some things we need to remember. Any time the government takes over something, it makes it less efficient. Banks had motivation for collecting on these loans and thus used wisdom in granting them–the government has neither. The amount of a college loan should be connected to the marketability of the skill required–borrowing more than $100,000 to get a degree in Women’s Studies does not necessarily make sense. As an aside, I once knew a person who had a Ph. D. in lute, but he was working for a living and being responsible financially. I also once worked doing data entry in a call center where one of the telemarketers had a degree in Ancient Egyptian Archeology. I asked him why he was working as a telemarketer, and he replied, “I like to eat.” An education is a wonderful thing, but at some point employment has to be a goal. Not everyone needs to go to college, and the American taxpayer does not have to pay the bill for everyone to attend.

 

The Promised Government Help With College Loans Is Not What It Appears To Be

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Yesterday John Podhoretz posted an article at the New York Post detailing what President Obama’s proposed changes in how college loans are financed would mean to the average student.

Mr. Podhoretz points out that the federal loan programs have resulted in out of control tuition costs at colleges. He states:

The staggering inflation in the cost of higher education since the federal government got involved in lending money to Americans for college in 1965 beggars description. One federal study found that between 1982 and 2007, tuition costs rose 432 percent while family income rose only 147 percent.

The article further reports:

So say you’re an average student carrying a $27,000 debt. Your monthly payment is about $208. With the reforms Obama is instituting, and assuming an interest rate of 6 percent, your monthly payment will drop $9 a month to $199. Staggering.

The article also points out that under the proposed changes, the government would be entirely responsible for college loans. Students would borrow directly from the government and pay the government back. What happens when students default? The taxpayers pick up the tab. Aside from the fact that the benefits to the students of this program are minuscule, we need less government in all aspects of our lives–not more.

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