Sunday, September 8, 2019

Wall Street Journal decries "The Great Student-Loan Scam": But the flimflam is even worse than WSJ describes

Last month, the Wall Street Journal published an editorial titled "The Great Student-Loan Scam," in which the newspaper excoriated the Obama administration for the way it handled the federal student loan program. According to WSJ, Democrats "nationalized" the student-loan market in 2010 to help pay for Obamacare.  Eliminating private lenders, Democrats said, would save taxpayers money.

Indeed, the Congressional Budget Office treated the federal student-loan program as a profit center during the Obama years by projecting that it would actually make money. Remember when Senator Elizabeth Warren accused the program of raking in "obscene" profits?

But of course, the student-loan program is not a profit center. It's been bleeding red ink for years.  The Obama administration's generous income-based repayment plans (PAYE and REPAYE) were touted as compassionate programs to relieve overburdened student borrowers and keep them out of default. But the plans were structured so that most borrowers aren't paying down the principal of their loans.

As one Obama-era advisor recently admitted, "There will be substantial amounts of student debt that will never be repaid." Oh, yeah. Most of it will never be repaid.

In fact, the student-loan crisis is worse than the Wall Street Journal characterized it. A Brookings Institution report, issued several years ago, projected that almost half of all student loans taken out to attend for-profit colleges would be in default within five years after entering repayment.

Education Secretary Betsy DeVos, of all people, candidly acknowledged how bad the situation is last November.  "[O]nly 24 percent of FSA borrowers--one in four--are currently paying down both principal and interest," DeVos said in a speech. Almost 20 percent of borrowers are delinquent on their loans or in default. And, by DeVos's calculations, 43 percent of all outstanding loans "are in distress" (whatever that means).

 Unfortunately, although DeVos is honest about the scope of the student-loan crisis, she is doing all the wrong things. DeVos's DOE bungled the Public Service Loan Forgiveness program, rejecting 99 percent of the initial applications for debt relief. And just a few days ago, the Education Department issued new regulations that make it more difficult for student borrowers to bring fraud claims against for-profit colleges.

In short, the Wall Street Journal accurately labeled the federal student-loan program as "the great student-loan scam." But the program is much worse than that. About 45 million Americans hold a combined total of $1.6 trillion in federal student loans, and at least half of those people will carry their student-loan debt to their graves. Yes, the federal student-loan program is more than a giant scam, it's a national catastrophe.







2 comments:

  1. Thanks for the excellent article.

    If i remember correctly, the Journal estimated that over two decades, the IBR programs might cost the government over $300 billion.

    My response would be "That's OK." $300 billion over 20 years is just %15 billion a year. That is peanuts in the federal budget. Believe me, if we can ease out of the student loan crisis for just %15 billion a year, we will be doing just fine.

    The press runs a lot of scare stories about government spending without putting the numbers in context. $300 billion is a huge number but not over 20 or even 10 years.

    This story also shows an ugly habit in Washington. It is true that Obama touted the federalization of loans as a way to pay for the ACA. Typical Washington cleverness! The honest way to pay for the ACA is to raise the ACA taxes! not to burden the participants in another governnment program!!

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  2. Loan obligations increase as compound interest does...geometrically, and to infinity. The ability of the real world to provide repayment for such obligations is finite, and limited. Defaults are mathematically inevitable. This is why ancient societies had regular debt jubilees. Until we get hip to that ancient wisdom, we'll continue to have "national catastrophes"...

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