The recently passed federal health care reform legislation was full of obscure provisions that few people had read (much less analyzed) before the bill was signed into law. Almost as unread and unanalyzed was the student loan legislation tacked on to the health bill, the Student Aid and Financial Responsibility Act (SAFRA).
SAFRA had passed the House in 2009 but had not been taken up in the Senate. Its prospects for passage there were bleak, so the Democratic leadership used the “reconciliation” tactic in the Senate to pass it, despite the fact that it had held no hearings on the bill.
The legislative tactics aren’t what I’m most interested in. Rather, I want to examine one aspect of the bill–its student loan forgiveness feature. That’s going to put taxpayers on the hook for a lot of added federal expense, in return for nothing.
As everyone knows, students often have to borrow huge sums of money to get through college. And—supposedly—having a high student loan burden drives graduates away from careers in public service because they need to earn the (again, supposedly) high salaries available in the business sector. Therefore, the public sector is “losing” a lot of talent.
That’s what Secretary of Education Arne Duncan said on a recent interview on the NPR program “All Things Considered.” Duncan stated, “Historically, there is always phenomenal talent, folks who graduated from college who wanted to go into the public sector, but because they had $60, $80, $100,000 worth of loans, they simply couldn’t follow their heart, couldn’t follow their passion. And so we lost a huge amount of that talent.”
Now, if you’re grieving over that alleged problem, cheer up. SAFRA can solve it. Under the new law, students who go into public sector work and stay in it for 10 years while making payments on their student loans will at that time have any remaining debt forgiven. Secretary Duncan calls that a “monumental breakthrough.”
It’s monumental all right—monumentally irresponsible.
First of all, it isn’t true that the “public sector” has difficulty in attracting competent workers. Duncan makes it sound as though jobs in the public sector (government and non-profit organizations) find it hard to get good, highly motivated people because of the low pay scales there. That may have been true decades ago, but today public sector compensation exceeds that of the private sector, as USA Today recently reported.
Not only has public sector pay zoomed ahead of pay for comparable private sector jobs, but government employees have better job security. In the current recession, vastly more private sector workers have been laid off than public sector workers.
Secondly, let’s examine Duncan’s idea that public sector employment is “losing talent” because many college graduates are unable to “follow their heart” into that supposedly noble realm. I would like to ask him if “heart” and “passion” really play any role in this decision since few government jobs are different from work in the private sector. Is a management job in, say, the U.S. Postal Service essentially different from a management job at, say, Federal Express?
Does anyone long to work for the Postal Service out of a desire to serve one’s fellow Americans—or because the pay and benefits are good and the job secure?
And what’s the justification for the assertion that the public sector is “losing talent” because some graduates have high debts to pay off? I can see no reason whatever for thinking that Graduate A, who has piled up $60,000 in student loans would necessarily perform some government job any better than Graduate B, whose family had saved enough for her to get through college debt-free. How, exactly, is the public any worse off because a few people who might have applied (along with many others) for government jobs decide to try for higher pay in the private sector instead?
Furthermore, this policy could just as well bump out some people who actually did have a passion for public sector work because the prospect of escaping from student loan debt enticed others to apply for the jobs they wanted.
In the paragraph above, suppose that Student B had a passionate desire to work for, say, the National Park Service. Student A doesn’t especially care about National Parks, but thinks, “Why not apply for this? I might luck out, get the job, and eventually get some of my debt wiped out.” If A lands the job (and don’t say that the Park Service people will necessarily recognize B’s greater passion; many job applicants are good at faking it), Duncan’s policy will have worked against his objective.
Now, what about the cost?
I don’t think it’s possible (or necessary) to give an accurate estimate of the added expense that taxpayers will bear due to this policy, but it’s certain to be substantial.
As the Pope Center’s Jenna Robinson has pointed out, some students already borrow more than they actually need for college. The new loan forgiveness policy is likely to lead to increased profligate borrowing by students who foresee that they’ll qualify for the federal government’s new generosity. Consider, for example, students training to be public school teachers. They are almost guaranteed jobs that will qualify them for loan forgiveness. So why shouldn’t they borrow to the maximum?
The amount of debt being erased under this policy (that is, transferred to the taxpayers) is going to be greatest among people who have gotten post-graduate and professional degrees. Here’s an example.
John Smith earns his BA, then goes to law school, borrowing heavily all the way to his JD. He has amassed $100,000 in loan debt. (That’s not unrealistic; this law school grad piled up almost twice that.) He’d like one of the few high-salary positions open in big law firms, but knowing that the chances aren’t very good, he also applies for a position with the Federal Trade Commission, and is fortunate enough to get it. His starting salary is $60,000; we’ll say that after taxes, he’s pulling in $50,000.
Under the new student loan repayment rules, John doesn’t have to pay more than ten percent of discretionary income, which is defined as adjusted gross income minus 150 percent of the poverty line (currently that works out to $21,549).
So in the first year, he pays $50,000 – $21,549) X .10 on his loan balance, reducing it by $2,845.
Assuming that John gets a 5 percent salary increase each year while passionately doing his work for the FTC, over ten years, he will have paid back $41,336. At that point, generous Uncle Sam forgives the rest of his debt—well over half of the original principal. I won’t bother adding in the interest on the loan (and the government is encouraging student borrowing with low interest rates: for loans first disbursed starting July 1 of this year, the rate is 4.5 percent and the following year it goes down to 3.4 percent). Obviously, the taxpayers have given John a big gift.
Secretary Duncan may believe that this new student loan policy is going to do great things for America, putting more highly dedicated people into public service. But that’s pure fantasy. This policy saddles taxpayers with additional costs in exchange for nothing.