As I have previously said: the federal student loan programs are an unmitigated disaster, causing massive tuition price inflation, campus administrative bloat, declining academic standards, and a reduction in the proportion of recent college graduates from low income families. Some Democrats tenuously running the federal government want to make it worse: lets forgive student loans, or allow people to simply pause their loans, or liberally honor requests for forbearance (temporarily excusing student loan obligations). According to a recent Wall Street Journal story, before the pandemic roughly three million of the 45 million with student loan debt were in forbearance; now about 20 million arenearly half.
The more centralist Democrats like President Biden said a few months ago that they want to simply forgive $10,000 in debt. The Bernie Sanders- Elizabeth Warren progressives want to forgive $50,000. Never mind the fact that many with large debts actually have high incomes from being doctors, lawyers or management gurus. Never mind the fact that many million conscientious Americans have worked hard and sacrificed to get out of student loan debt. The federal government seems to be saying: Lets reward the bigger borrowers slow to repay debt, often partly because of big post-college spending, and lets punish the hapless Americans who have honored their loan commitments by paying them off. Why would future generations of borrowers of federal student loans ever bother to repay their obligations? Wait long enough, and the politicians will bail you out. Whether the executive branch even has constitutional authority to drastically alter programs approved by Congress is highly debatable, although Congress and the President could agree to new legislation.
More generally, Americans increasingly are threatened with financial pain from previous irresponsible decisions. This is the second consecutive year when the federal budget deficit will exceed 10% of GDP, while the money supply in 2020 grew by double digit percentageswe are following the pattern of nations like Argentina or Greece that have suffered from long periods of lackluster economic growth because of their massive fiscally reckless conduct.
What makes current federal student financial assistance policies so egregious is that we are implicitly telling young persons making their first large investment decision (borrowing to pay for college): dont take your obligations too seriously. If things get rough, we will excuse your obligations. That is a very bad lesson to teach young persons, and policies like that could ultimately lead to the nations economic demise relative to ascending Asian powers.
There is lots of evidence suggesting we are overinvested in higher educationtoo many students dont graduate, or get jobs that can be filled by high school graduates. We should be exploring alternative ways of financing college or non-degree alternative forms of vocational training. But the higher education lobby is powerful and skeptical of big changes in the status quo. Hyper-partisanship discourages innovation. Two ideas make a lot of sense and might get some bipartisan support. First, make colleges have some skin in the gameforce them to face some financial consequences for admitting large numbers of dubiously qualified kids who run up huge amounts of loan delinquencies that taxpayers must cover. Make colleges, in effect, become cosigners on federal loans. Incentivize colleges to select students who likely will be at least marginally successful.
Second, simultaneously move to privatize financing college. Start limiting availability for federal loansending the parental PLUS loan program, putting time limits on loan support, eliminate vast lending for professional degrees. At the same time, encourage non-lending forms of college financing, such as income share agreements, turning the burden of college financing more over to experienced investors, while putting college lending on more of a commercial basis.
Maybe we should go back to first principles and ask: why do we publicly subsidize attending colleges? Allegedly, they promote positive externalitiesspillover effects aiding society while potentially improving income mobility. However, I see considerable evidence instead that today they foster elitism, promote education credentialed aristocracies, and stifle economic growth. As the late great economist Milton Friedman presciently told me in an email about 18 years ago, perhaps we should tax rather than subsidize colleges and their students. The loan programs probably need to be ended or substantially revamped.