“Increases in financial aid in recent years has enabled colleges and universities blithely to raise their tuition, confident that Federal Loan subsidies would help cushion the increase.” – William Bennett, Secretary of Education, 1987
Last week, we saw how millennials are finding it difficult to buy a home, thanks to the crippling burden of student loans. This unfortunate outcome is the inevitable and predictable result of a well-meaning but fatally flawed federal lending program. Intended to equalize opportunity, the system has instead increased inequality, inflated costs, and saddled a generation with debt. So what went wrong?
First, the system essentially ignores ability to repay. Commercial lenders consider income as an essential criterion in making mortgage or auto loan decisions. But federal student loans are based upon the cost of attending a particular institution, and do not factor in potential future earning power. So it is all too common for a student to rack up six-figure debt at a private institution in pursuit of a degree in a field whose compensation structure precludes repayment. Clearly some form of potential income assessment should be applied in limiting the total aid available.
In an effort to address the burgeoning problem of oppressive debt service payments, the Obama administration introduced an income-based repayment plan. The objective was to limit monthly obligations, even if the payments would not fully amortize the loan. Any remaining balance would be forgiven after 25 years.
Two problems arise with income-based repayment. The obvious one is the burden to taxpayers. Since federal loans are now made directly by Uncle Sam, taxpayers pick up the tab for any forgiven balances.