Student Loan Forgiveness: Bread and Circuses for the 21st Century

In late June Congress acted to freeze the interest rate on certain college loans at 3.4 percent for an additional year, claiming this move would help make college more affordable. Of course, a relative handful of college students saving a few dollars each month doesn’t translate into college affordability—and the Obama administration knows it.

So apparently it’s time to find a scapegoat before the bills come due—and before college students head off to the voting booths.

Last week the Consumer Financial Protection Bureau released a new report on the big, bad private student loan market—even though the feds took over direct lending to students in 2010 as part of the Affordable Health Care Act (ObamaCare). The CFPB’s solution to loan debt? Letting borrowers off the hook. As the Wall Street Journal reported:

With roughly $1 trillion in student loans outstanding, close to $900 billion are federal loans, and Uncle Sugar is responsible for more than 90 percent of recent loan originations. But the existence of a market sliver still occupied by private enterprise gives politicians a handy industry to blame for mounting troubles in a government-dominated business.

Even though nearly 90 percent of defaults are occurring on loans backed by the taxpayer, last week the Consumer Financial Protection Bureau rolled out a new report on purported flaws in the private market. To underline the absurdity of focusing on private loans, the White House’s own budget is forecasting default rates above 20 percent on some types of federal loans issued in fiscal 2013. That means defaults could be in the titanic range above $20 billion. All of the private firms probably won’t issue half that amount in total loans, never mind bad loans.

The new report says that Congress should consider letting borrowers discharge their private student loans through bankruptcy. This would reverse a hard lesson learned during the 1970s. After a surge in former students declaring bankruptcy to avoid repaying their loans, Congress acted to protect lenders beginning in 1977. First it limited the ability of borrowers with government loans to use bankruptcy as a bailout ramp, and later the ban was applied to all student loans (with some exceptions for hardship cases).

This reform also protected future borrowers. Credit miraculously becomes more available when lenders believe they might be repaid.…

While we don’t doubt Mr. Obama’s sincere impulse to redistribute money, the timing of this effort suggests it is one more election-year pander to the young voters who showed up for Mr. Obama in 2008 but may be less enthusiastic this time. Unemployment among Americans age 20-24 hit 13.7 percent in June, up from 13.3 percent in January. So first the President made a big deal over cutting student loan interest-rates to save a few bucks, and now he’s telling young voters he’s making it easier for them to avoid repaying at all.

Young voters may appreciate Mr. Obama’s latest efforts to help them weather the Obama economy. But wouldn’t it be easier merely to encourage job creation rather than try to anticipate and make taxpayers pay for every consequence of joblessness?

One would think so, but it seems many Washington politicians prefer taxpayer-bankrolled bread and circuses instead.

Vicki E. Alger is a Research Fellow at the Independent Institute and Senior Fellow and Director of the Women for School Choice Project at the Independent Women’s Forum. She is the author of the Independent book, Failure: The Federal Misedukation of America’s Children.
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