Student loans: The $1 trillion federal debacle you haven't heard about

Nothing like ending the year on a hopeful note, eh? It's been six years since the federal government spent more than $700 billion on the Troubled Asset Relief Program - not a popular move around here but probably necessary to prevent the impending implosion of the entire financial system. That was an emergency brought on by a lot of forces, including federal policies that encouraged far-too-easy mortgage lending for people who couldn't repay. But at least you can say that it was designed to see the government recoup most of the money, and in fact that largely happened.

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A much bigger debacle is now brewing, and this time it's designed by the Obama Administration to see as little of the taxpayers' money as possible recouped. We're talking here about student loans. In 2010, the Department of Education seized control of the student loan market from private banks and began a very aggressive campaign of encouraging more borrowing by college students. The more student debt, the better. That might help to produce more degrees in the short term (although it also produces its share of dropouts who still carry the debt), but what happens in the long run when students are in their 30s or 40s and still trying to pay off the debt? No problem! You don't want to pay it back? The Obama Administration is your friend. The Wall Street Journal reports:

So-called income-based repayment programs reduce a borrower’s monthly payments and then forgive the remaining principal after a period of years. Graduates who choose the nonprofit and government jobs favored by the President can have their loans forgiven entirely after 10 years. Mr. Delisle has dug into the government’s numbers and finds that the take-up rate of these nonpayment programs is far larger than most Americans appreciate. Two years ago the Administration’s estimate of the average amount to be forgiven in income-based repayment plans was already $41,000 per borrower. The total amount of forbearance loans is $125 billion, and rising. And even with all of these ways to avoid on-time repayment, borrowers are still defaulting at a rate of nearly 20%. The clear danger is that hundreds of billions of dollars will never be repaid, which means that future taxpayers will have to pick up the tab.

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On the same page, Jason DeLisle explains that the number of students who end up in default is at nearly 20 percent, and that is not an accident. The government designed it to work that way:

The Obama administration greatly expanded benefits under income-based repayment plans in recent years and has launched efforts to promote them. Enrollments are growing rapidly and now stand at an all-time high. Some 24% of Federal Direct Loan Program balances ($115 billion) that have come due are enrolled in the two most generous plans, Income-Based Repayment and Pay As You Earn. That is up from 14% a little more than a year ago. The number of borrowers using the plans has doubled over that time, to 2.2 million. Despite more borrowers taking advantage of benefits to suspend and lower their payments, the share of borrowers in default is still trending upward. It now stands at 19.8% of borrowers whose loans have come due—some 7.1 million borrowers with $103 billion in outstanding balances. That’s the highest share since the Education Department began making the statistic available in 2013, and given other trends, it probably is a record high. These trends are troubling because the U.S. economy has been improving for some time. Yet fewer and fewer borrowers are repaying their federal student loans. For those who do make payments, more of them are paying too little to retire the debt they took on. This all makes sense, however, when you realize that the student-loan program has been designed to achieve two political goals: Loans should be available to any student, at any school, pursuing any credential; and student debt is bad and burdensome, so it should be easy for borrowers not to repay.

Taxpayers are going to be on the hook for that $1 trillion when the whole system collapses, but hey, it's only money.

Now here's the end game to all this: First, by allowing forgiveness of loans after 10 years if, and only, if you work for government or a nonprofit, Obama is trying to increase the number of people who have a vested interest in big government. If you are a government employee or you depend on government grants, you become a natural enemy of the idea of limited government. Second - and this will sound familiar - putting in place a ridiculously complicated system that encourages defaults and requires lots of forbearance becomes an argument for a far simpler system. And what would that be? To hear a Democrat tell it, it's simply to make college tuition a federal entitlement. Finally, easy-money student loans keep cash flowing to lots of public institutions, which rely on taxpayer money, which keep lots of public employees in their jobs and contributing campaign cash to Democrats. Of course, the taxpayers are going to be on the hook for that $1 trillion when the whole system collapses, but hey, it's only money. This is going to be a tough one politically for the new Republican Congress to deal with because Obama will accuse them of hating students, hating higher education and all that. Then again, Obama proves time and again his disdain for taxpayers, but I guess that's not a protected class in American society these days.

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