In Washington DC, the Tax Consumers Always Win

Politicians typically try to win votes by giving away money. Being a political Santa Claus usually is seen as more rewarding than being a federal Ebenezer Scrooge. Which is why there’s now a $1.2 trillion federal student loan program which, the New York Times politely observed, “has been removed from the norms and values of prudent lending.”

Federally subsidized student loans have become a political favorite, as Uncle Sam added $82 billion to his loan portfolio in 2015. An incredible 42 million Americans have outstanding debt; 6100 schools have collected subsidized loans. Congress has created an educational “entitlement” akin to Medicare and Social Security, only for the young.

A lot of that cash will never be repaid. As of 2014, 28 percent of those whose loans became due in 2009 were in default. Anticipated lifetime default rates for cohorts 2007 through 2011 steadily increase from 15.9 percent to 18.4 percent. The Huffington Post’s Shahien Nasiripour warned: “Federal student loans made in recent years resemble the toxic subprime mortgage loans that helped cause the Great Recession.”

After shoveling out money to people with little credit to attend schools unlikely to prepare them for work that pays, Uncle Sam provides multiple outs from having to repay the loans. For instance, people are entitled to three periods of forbearance.

The federal government also forgives loans for students who it believes to have been scammed in some sense by poor quality, typically for-profit, schools. But even in the case of flagrant fraud, why are the taxpayers responsible?

As Megan McArdle pointed out, “People get taken by scams every day, often with the help of government money. Should Fannie Mae forgive the mortgages of people if the buyer misrepresented the condition of the house?”

A multitude of public institutions underwrite what turn out to be very bad ideas. People may need relief but, McArdle observed, that’s what bankruptcy is for.

Congress also has created a forgiveness program for “public service,” which, of course, mostly means public, not service. Private jobs typically offer plenty of “service,” and the government often pays more—along with far greater job security—than private employers for similar “service.” Yet so far some 300,000 people have taken advantage of the program.

As a result, noted the Wall Street Journal, the program is yet another to spiral out of control, “encompassing far more workers than envisioned, many of them well-paid. Thousands of workers with graduate degrees are on track to discharge five-and six-figure debts on their way to typically lucrative careers.”

Next year the “Pay As You Earn” program, passed by Congress but expanded via executive order, will cost Uncle Sam $22 billion in lost loan repayments. PAYE limits monthly payments to ten percent of income and forgives the remaining debt after 20 years.

Sen. Elizabeth Warren (D-Mass.) has pushed a $60 billion refinancing plan to reduce borrowers’ interest payments. We’re all already helping middle class kids attend college. Shouldn’t they at least pay what they promised on their loans?

Publicly subsidized student loans make no policy sense. The “social” benefit from education is greatest at the lowest levels, when people learn to read and write.

College is viewed as the ticket to professional success and attending college yields a large wage premium. But that benefits the individual, not society. Which is precisely why individuals should pay for school, rather than government.

The “social” benefit of piling up bachelor degrees—especially in the soft social sciences—isn’t obvious. Even more so, advanced degrees primarily benefit individuals. It is perverse to force lower income people to finance professional degrees for those destined to be part of the one percent.

As I note for the Freeman: “The federal student loan program illustrates how in Washington the taxpayers always lose. It’s time someone in government began to act in the interests of those who work and pay for everyone else.”