Forgive and Forget Won’t Fix College Debt
“Free” college and loan forgiveness are increasingly popular ideas. According to a recent AOL News poll, for example, 49 percent of respondents believe every state should offer free four-year public college tuition. Another poll by MoneyTips.com found that nearly 42 percent of respondents favored forgiving all student loan debt.
Such results are understandable. After all, who doesn’t like forgiveness and free stuff?
The ones paying for it, that’s who–especially since the bill’s probably going to be pretty steep.
Total student debt now tops $1.4 trillion, and there’s growing evidence that borrowing by the federal government to subsidize its student lending is hurting the economy.
President Trump has proposed several student loan reforms designed to streamline repayment plans and make them more affordable for student borrowers (p. 20).
Under Trump’s plan no more students would be eligible for the Public Service Loan Forgiveness program (pp. 20, 33, and 39), which was signed into law in 2007 by President George W. Bush to forgive outstanding student loan balances for government employees and those who work in certain non-profit and service sectors, such as the Peace Corps, after 10 years. (See also here and here.)
Trump’s plan would also eliminate subsidized loans, which offer different rates for low-income students, and replace them with a single income-driven repayment (IDR) plan instead (p. 33; see also here, here, and here).
Under his plan borrowers would make higher monthly repayments from their discretionary income, 12.5 percent versus the current 10 percent, but any remaining balances would be forgiven after 15 years instead of 20 years (p. 20; see also here and here.)
The theory behind the expansion is that incentivizing students to take summer courses will result in speedier graduations. Trouble is Pell Grants already cost near or north of $30 billion annually–more than $31 billion last year alone–but there’s scant evidence that a majority of recipients graduate (p. O-15).
In fact, it wasn’t until 2014 that Congress even required the U.S. Department of Education to report on the graduation rates of Pell Grant recipients (see here and here). What little information ED was able to scrape together showed that only around 38 percent of them graduated from any four-year or less than four-year institution within six years (p. 5).
Trump’s reforms would save student borrowers thousands of dollars more than the current repayment policies because the loan amounts forgiven under his plan are higher, according to a new Brookings Institution analysis (see here also). Yet the plan “goes too far in providing additional loan forgiveness to borrowers who are more able than many to repay their debts,” according to the authors.
That’s the first problem with plans promising “free” college and loan forgiveness: they undermine personal responsibility.
The second problem is that such plans do almost nothing to contain college costs. Instead, “free” college and loan forgiveness simply shift who’s footing most of the bill from students to taxpayers subsidizing the costs indirectly—and those subsidies will continue no matter how much colleges raise their tuition and fees.
Insulating colleges from the consequences of their failure to contain costs and keep prices affordable is a third negative consequence of “free” college and loan forgiveness schemes. When students are responsible for paying for their college education, including paying off their loans, there are powerful incentives for colleges to contain costs and offer institutional aid. Otherwise, they risk losing students to more affordable competitors.
Paying for college directly would also make undergraduates much more sensitive to the value they’re getting relative to the money their spending. Such price sensitivity would also probably go a long way toward curbing the rampant entitlement mentality on too many college campuses these days. (See here, here, here, and here.)
When it comes to containing college costs, forgive and forget is a path to the poorhouse–for all of us. Private lending, philanthropy, scholarships, business-supported work study programs, and tax-free college savings plans are all better options.