Borrowing Votes

The Occupy Wall Street protestors, as unpalatable and irrational as they may seem, have one positive achievement to their credit: They brought the student loan crisis into the limelight.

Easy credit for higher education has led to too many young people starting their adult lives deeply in debt with useless degrees and weak job prospects.

Addressing the loan situation presented President Obama an excellent opportunity to restore his connection with the twenty-somethings whose energy and adoration helped bring him to power in 2008. So on October 26, in a speech in Denver, he announced his proposed reforms.

Unfortunately for the president, his proposal to restructure the federal loan program is too minimal to garner much enthusiasm from protesters and other supporters of student loan forgiveness. Indeed, most of the details were already approved by Congress in 2010; the only change the president made was to move up the start date for the changes from 2014 to 2012.

Unfortunately for the nation, what little effect his new proposal will have will slightly exacerbate the problem of overspending on higher education.

There are two main points to his plan. For the first, a little background is necessary. Since 1965, the federal government guaranteed some student loans originated by private banks under the Federal Family Education Loan Program (FFEL). President Obama ended that program in sweeping higher education reforms made in 2010, so all new student loans now come directly from the Department of Education.

Under the changes the president announced, the approximately 5.8 million former students with both FFEL and direct loans will have them consolidated into one direct loan. They also get a .25 percent reduction for consolidating and a .25 percent reduction by paying with automatic withdrawals from their accounts. By shifting the FFEL loans into the direct loan program, students can have the FFEL loans forgiven after ten years of repayment (and have been since 2010), as direct loans are, should the borrowers opt for “public service” by working for government or non-profit organizations.

The second change will reduce the minimum annual repayment from 15 percent of the (former) student’s discretionary income to 10 percent. It will also forgive all remaining balances on student loans after 20 years of repayment, instead of the current 25-year limit.

These proposed changes appear to be superficial campaign strategies rather than substantive reforms; more important, they once again send the wrong signal to borrowers: that personal responsibility doesn’t matter, that somebody else will pay for bad choices, and that more money will be pumped into higher education, despite the outcomes. 

Student debt is a big problem and becoming bigger. Outstanding student loans in the U.S. now exceed $1 trillion, more than all outstanding credit card debt. It is not uncommon for students to accumulate $20,000 to $200,000 in total debt, some without graduating. Default rates for students leaving school in 2008 are approaching 14 percent.

For years, students have been encouraged by schools, banks, government officials, and the media to borrow to get through college, with the expectation that a good job would await them upon graduation and repayment would be easy. Lenders gave little attention to the students’ potential for repayment—fine arts and sociology majors with weak academic credentials were often scrutinized no more than gifted engineering students.

Then the economy fell, adding to a long-term glut of college graduates in many fields. Roughly 31 percent of college graduates now work at jobs that don’t require degrees; even many in scientific and technical fields are having trouble finding commensurate employment.

Yet, the drumbeat continues for students to attend college—by any means, including loans. Posters outside of high school guidance offices herald the famous $1 million “income premium”—the extremely suspect average difference in lifetime earnings between college graduates and non-graduates. Politicians everywhere have bought the hype that investing more in education will bring greater prosperity.

But that investment—especially financial aid—has caused the cost of education to spiral ever upward. The more financial aid a college or university receives, the higher the tuition, because school officials know that students will pay the difference (which remains constant). For example, in-state tuition and fees at four-year public colleges rose by an average of 8.3 percent this year.

The president’s proposal, rather than providing solutions, will help perpetuate the problems.

The second part of the proposal—the lowering of repayment and forgiveness limits—will apply only to current and future students, not to people already out of school. It therefore provides potential relief to future borrowers—ensuring the president’s allies in academia with a steady stream of new students amassing more debt than they can reasonably expect to repay. 

It is also hard to imagine that President Obama’s tepid measures will shore up his support on the far left, which is calling for extensive debt relief through government intervention. Rep. Hansen Clarke (D-MI), for example, has introduced a bill (HB 365) proposing that student loans be entirely forgiven. Lawyer Robert Applebaum has gathered more than 300,000 signatures on a petition calling for complete student loan forgiveness at And has taken things even further, using the issue of student debt to call for free tuition.

The U.S. economy needs young people to stop burying themselves deeply in debt for educations that give them few marketable skills. The president’s proposal takes us in the opposite direction. It may also even hurt him politically rather than help him recapture the youth vote. That’s what happens when you offer campaign slogans instead of serious reform for serious problems.