The Government’s Student Loan Scam and What to Do About It

Student loan debt, which continues to rise inexorably, has now reached $1.7 trillion, with clamor arising apace for President Biden to honor his campaign pledge to trim $10,000 off everyone's account. Not enough say Elizabeth Warren and even Chuck Schumer, who want it to be $50,000. The respective costs would be $373 billion and close to $1 trillion, estimates the Brookings Institution. “I’m prepared to write off $10,000 debt, but not [$50,000] because I don’t think I have the authority to do it” by executive order, Biden said at a February 2021 town hall.

Warren and Bernie Sanders want the president to cancel all student
debt for the 43 million Americans on the hook. They go much further in advocating that that two-year community college should be free. So should four-year public college, says Sanders. Taxing the rich would pay for it, he says.

“We don’t actually have to do anything in Congress”, Warren said last September. “The President of the United States has the power to cancel student loan debt on his own.” She presumably refers to the Higher Education Act which lets the Education Secretary "enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand". The president has been waiting since April for a memo he requested from the Department of Education on what authority he has.

Every one of these proposals raises profound issues of inequity. Canceling debt makes fools of those who struggled for years to pay all of their debt, or worked their way through college to avoid debt when they could have had a free ride off the government, or joined the armed forces at possible risk of life in order to take advantage of the educational opportunities military service afforded them.

The Washington Examiner calls it a "tremendous wealth transfer" to the college educated while doing nothing for the tens of millions of workers who forsook college, apprehensive about the debt burden, but would now through their taxes pay for the magnanimous gift the government would be giving to those who enjoyed the privilege of a college education.

In a letter to The Wall Street Journal, Patrick Demetruk of Stephenville, Texas, makes this resounding point:

"Maybe the colleges with the multimillion-dollar endowment funds that are benefiting from these overpriced educations should be on the hook for the forgiveness of the debt and not the U.S. taxpayer."

Loan forgiveness would perversely benefit all the more those who borrowed the most as for advanced degrees — business, medical, law, etc. — in order to gain higher paying jobs. (Brookings calculated that those earning over $74,000 a year post-college owe almost 60% of the nation's $1.7 trillion.)

Wiping out college debt would also reward those who took on far more debt than they could ever repay by their choice of a low-paying occupation, such as a 29-year-old in a Journal article with a fine arts degree, $300,000 of debt, working as a Hollywood assistant making from $30,000 to $50,000 a year in temporary jobs as a film assistant and in video production, or University of Southern California students loading up on $115,000 of debt for masters degrees in social work.

Nevertheless, action must be taken, and we wonder why we’ve seen no one come up with the just and equitable solution we propose here. Stay with us.

The debt load is weighing down one generation going on two. With 7.65% in payroll taxes already taken from their paychecks, having another $400 or so drained from their bank accounts every month is crippling people well into their adulthood (the median debtor is 34 years old). Young people forestall marriage, postpone having children, can afford only used cars, can't get a mortgage to buy a house. Student debt is a serious drag on the economy.

Before getting to a very different approach, a mention that certain classes of borrowers have seen erasure of debt. Some $5.8 billion was wiped out for the 323,000 borrowers who are totally and permanently disabled. Close to $3 billion is available to refund students who were misled by false marketing claims of, most typically, for profit colleges, or whose colleges closed while students were enrolled, such as the 115,000 who attended ITT Technical Institute.

There are then two types of programs that attempt to mitigate the debt burden:

Public Service Loan Forgiveness: Those who devote themselves to public service — federal, state and municipal workers; teachers; charity workers, etc. — can have their remaining debt forgiven after 10 years. But qualifying is difficult. Only full-time jobs count; one must have the correct type of loan; show a perfect record of 120 on-time payments. That relies on perfection at the payment servicing companies as well, where shoddy bookkeeping has proven to be a nightmare for borrowers to straighten out. Moreover, Trump's Education Department was helmed by Betsy DeVos, from one of the nation's wealthiest families, who thought all debt reduction was a "free money" giveaway. Under her, 98% of public service applications were rejected.

Income-Based Repayment Plan: Loan repayment is tied to income, 15% for older sign-ons to the program, lowered to 10% by the Obama administration, with any unpaid balance canceled after 25 years, or 20 years for later applicants during Obama.

But under both these plans, benefits happen at the back end. Neither helps borrowers today. Unsurprisingly, millions would be in stages of deferred payment or outright default were it not for the pandemic, which caused President Trump in March of 2020 to put loan payments on hold and set the interest rate at zero, a moratorium continued by Biden until May. But if we look back to pre-pandemic 2019, about 10% of the federal student-loan portfolio was 30 days or more past due, and another 20% was in deferment, called "forbearance", where the borrower has asked for a pause in payments (but with interest unceasingly piling up).

The principal reason former students have difficulty paying is that the college costs they signed up for have been allowed to rise into the stratosphere. In the almost no questions asked loans for everyone policy of the federal government, universities saw the opportunity to raise tuition to predatory levels to cash in on the bonanza.
The average tuition fee at four-year public universities in America after adjusting for inflation has roughly tripled over the past three decades, according to The Economist.

Strange that no one brings up interest charges. America wants a well-educated workforce, whether in liberal arts, engineering, law, medicine, trade skills — any and all. Education is virtually the national mantra, universally cited as the path upward, the route to a better life, and essential to U.S. competitiveness in a challenging world. It's why there is a government student loan program. So why does the government charge interest on student loans?

The answer is that it makes money for the government, which makes government a confidence artist, peddling the virtues of education so that it can charge. "Congress has a hard time changing programs that make money for the government", said a Journal article. America's students are treated as a profit center, and that is obscene.

Students who are still dependents of their parents can borrow up to $31,000; those no longer dependents can sign on for up to $57,500. But in the 1990's, Congress went further with its PLUS program that let parents borrow amounts limited only by income and credit standing, and for the full cost of education (room and board, books, etc.), not just tuition. A decade later, Congress added a PLUS program for graduate students, again with no dollar limit. Enrollees in both pay higher interest rates than undergraduate borrowers, and PLUS signers are even charged a 4.25% origination fee!

That they make money is a major reason Congress created the PLUS programs, which quickly became the fastest-growing in the student loan mix, with about 3.6 million parents and 1.5 million grad students owing about 12% of the $1.7 trillion on the books but accounting for 26% of new loans.

And look at the rates undergraduates have been charged (table), rising to 3.73% for this year.
Among all borrowers, 5.8% is the average student loan interest rate and we see in the table that rates have run to over 4% in years like the present when the federal funds rate was virtually 0%. Graduate students borrowing directly will be charged 5.28% this year. PLUS borrowers, parents or graduate students, face a 6.28% rate, up from 5.3%. This is grift, exploitation of the young by Congress and the federal government.

If we take as a premise that major debt relief action needs to be taken — acknowledging, there's the opposing argument that people should be held responsible for the debt they have taken on — reversing interest would be the equitable course. What we mean by reversing interest is this:

As an accounting entry, apply the entire payment history of each borrower to principal — the face value of the loan — as if interest charges never existed, and cancel interest on the balance yet to be paid. With interest charges removed as an inducement to repay promptly, convert all loan repayment to percentage of income until paid in full. End back-end loan forgiveness.

This action does away with the unfairness of outright canceling of all future obligations proposed by progressives, unfair to those who have dutifully been paying for years. Spread on both past and future, wiping out interest equitably benefits all. Other than the 10-year debt elimination meant to encourage people to choose low-paying public service careers, loan forgiveness was essentially an acknowledgement that the student loan program is too onerous, but with the interest burden eradicated, and all plans shifted to manageable percentages of income, forgiveness loses its justification.

As to cost of this proposition, the loan program faces steep costs in any event. In 2020 the Education Department estimated that $435 billion will eventually be written off owing to the forgiveness programs and those who have no prospects for repaying. That figure has only grown with the accelerating PLUS programs' borrowers who run up much higher debt. Given that eventuality, it makes sense to move that write-off cost to now by canceling its principal cause — interest — to lighten the load now. Twenty years after entering school, half of student borrowers still owe $20,000, says Education Status Initiative.

Despite the deluge of data on the Internet, the cost is difficult to calculate because none of that data considers interest elimination, but given the typical undergraduate borrowed amount of $30,000, the standard repayment plan of 10 years, and the average interest rate of 5.8% for all loans currently outstanding, the total interest forfeited for 43 million in hock to the government would be $413 billion. In fact, more than $30,000 is borrowed by graduate students and on average it takes 21 years for borrowers to pay off their loans. They had to opt for longer than 10 year terms or had difficulty paying, with piled-on interest putting them further behind. So the "cost" would be considerably higher.

But no matter because it is only a bookkeeping entry. No dollars flow. The only exception would be refunds to those whose total payments have exceed the principal of their loan. Killing interest reduces future government revenue. We argue it should, given the cupidity of profiting from students.