|
President Obama today announced a plan that will ensure
students are able to commit to higher levels of federally backed student
loans. By limiting student obligations to repay, and by passing more of the
repayment burden onto taxpayers, colleges and universities will be able to
continue to raise tuitions at a rate that outpaces nearly every other cost
center in the American economy. The move will come as a great relief to an
education establishment increasingly concerned that students might no longer
be able to afford skyrocketing tuition rates.
The AP reported today that state support for higher
education has fallen 23% after accounting for inflation over the last ten
years, even as tuitions have risen 5.6% faster than CPI. This gap has been
bridged by a whopping 57% increase in federal student loans over the same
time period due to the increased cost of tuition and number of student
enrollment.
The Obama plan limits repayment obligations on those
federal loans to just 10% of "discretionary income" which it
defines as total income above 150% of the federal poverty level - currently
translating to about $16,000 for an individual, or $33,500 for a family of
four. The plan also limits the term of obligation to 20 years. These terms
represent a substantial easing and acceleration of the terms in Obama's
"Pay as You Earn Plan," which was just announced last year (see my April 2010
response to that plan).
That plan, which was scheduled to begin in 2014,
represented the first time the government had imposed any limits on repayment
obligations. It had capped repayments at 15% of discretionary income for 25
years.
Assuming that a successful college graduate would earn,
on average, $80,000 per year over the course of the 20-year obligation
period, the repayment burden under the new plan will total somewhere around
$4,500 per year, or $90,000 for the life of the loan. A less successful
graduate who earns say $50,000 per year, on average over the 20-year
obligation period, would have a repayment burden of just $1,500 per year, or
just $30,000 over the life of the loan. Any loan amounts above those totals
will be forgiven.
As a result, students need not fear the inability to
repay large loans. They need not worry about future interest rate increases,
which could raise their payments.
More importantly, students will feel diminished
pressure to obtain high paying jobs.
In fact, the less a graduate earns, the greater the
amount of loan forgiveness.
For the majority of students, who don't become very
high earners, it will make little difference if loan amounts are $90,000,
$180,000 or even more. As the repayment burden will be capped to a percentage
of average income, loan repayments will be the same for any loan beyond a
certain threshold.
These policies could remove all barriers for larger and
larger loans, which will then allow universities to charge higher and higher
tuitions. This will permit them to maintain their bloated administration
infrastructures and will allow them to continue loading up their campuses
with even fancier facilities such as gymnasiums, performing arts centers,
food courts, and health centers. The day of reckoning in which the higher
education system would have had to offer programs that fit into the budget of
average Americans has been postponed, if not entirely eliminated.
Of course the losers in this new arrangement will be
American taxpayers who will be on the hook for the unpaid balances. Recently,
college loan debt passed credit card debt as the largest, non-mortgage,
source of debt in the United States. The balance of these unpaid student
loans will be thrown onto the pile of America's escalating unfunded debt. Of
course, the moral hazard implicit in the program means these liabilities will
now pile up even faster. In addition, the program substantially increases the
interest rate risk to which taxpayers are already over-exposed due to the
short maturities of the national debt. The higher student loan interest rates
rise, the larger the unpaid balances that taxpayers will be forced to assume.
Obama's move is likely to set off a student loan
forgiveness arms race in which politicians may continue to ease and cap loan
repayment obligations. With nearly a trillion dollars of outstanding college
debt rapidly increasing, debt forgiveness for the young could be the
political equivalent of protecting social security for the elderly. If college
students were willing to rack up this much debt under the assumption they
would have to actually pay it back, imagine how much debt they will be
willing to amass now that they realize they do not? As a result, expect
college tuition increases to not only continue but to accelerate.
In a way, Obama would be turning higher education in to
a third-party payer system (not too dissimilar from our current health care
system - which is also characterized by outsized cost increases). Under this
new system, colleges might charge whatever they want because their customers
simply turn the bill over to the U.S. taxpayer who has no say in the
transaction. Under such a system what incentive would a kid have to live at
home and go to a community college? Why not attend the most expensive
university that taxpayer money will allow? I suppose Obama was so impressed
with how this dynamic works with health care that he decided education could
use some of the same medicine.
|
