Student Loan Forgiveness: Uncle Sam’s Generosity Will Cost Much More than Previously Estimated

When politicians and Education Department bureaucrats began designing policies to lessen college students’ federal loan burdens, they weren’t concerned much with the cost to the taxpayers. Their imperative was coming up with popular and ostentatious ways of helping indebted students; exactly how much doing so would drain the Treasury was of little consequence.

At the urging of Senate Budget Committee Chairman Mike Enzi, the Government Accountability Office (GAO) undertook an analysis of the probable costs of the government’s various loan repayment and forgiveness programs. The GAO’s report was released on November 30. It concludes that the cost of the programs can’t be calculated exactly, but will be more than twice what had been originally expected for student loans made in the years 2009-2016.

According to the GAO’s estimate, the current student loan forgiveness programs will cost the government at least $108 billion. It could be higher because the Department of Education has been aggressively promoting such programs. If the government’s outreach efforts “succeed” in increasing enrollment, the costs will rise significantly.

In the last three years, enrollment has tripled in the government’s two programs that lower students’ monthly payments and can wipe out their debt balance after as little as ten years (if they work in a “public service” job, which covers roughly 25 percent of the labor force) or twenty years for jobs in the for-profit sector of the economy. For most students, lower payments combined with the prospect of forgiveness is a nice deal and few politicians can resist such seemingly cost-free generosity.

Nor is there reason to anticipate much if any change in policy under the Trump administration. During the campaign, Trump voiced support for helping students with loans by proposing a cap on monthly payments at 12.5 percent of income as well as a 15-year forgiveness policy. He’s likely to push for something from Congress so he can say he carried through on that.

Moreover, there are bills in Congress that would make the system easier and more generous toward student borrowers.

One is the SIMPLE (Streamlining Income-Driven Manageable Payments on Loans for Education) Act, which has bipartisan support in the House. It would automatically enroll a student in income-based repayment once he or she misses a payment. Another is the Student Loan Tax Relief Act, which would change a feature of the income tax code. Currently, when a student benefits from loan forgiveness, the amount is treated as taxable income, but not if the student received debt elimination under the Public Service Loan Forgiveness program. This bill would eliminate the tax on forgiven student loans.

The sad truth is that all of the momentum is toward making the federal student loan system less burdensome for those who borrow for college. One would think that we’d held a national referendum to identify our most pressing problem and reducing the burden of student loans came out on top.

But should it be so important? Among the sensible questions Sandy Baum asks in her recent book Student Debt is “Should subsidizing student borrowers be at the top of the social agenda?” Her answer is that it shouldn’t necessarily be since, she writes, “people owing educational debt are not the worst off members of our society.”

In fact, many student debtors who benefit from loan forgiveness are very well off. For example, some lawyers have cleverly played the system so as to get a large percentage of their loans for law school forgiven. They’re earning fine salaries in “public interest” work, yet escape paying for much of the cost of their education. (See “How Elite Law Schools are Offering Free Rides on the Taxpayers’ Dime” by Jason Delisle and Alexander Holt.)

Loan forgiveness is therefore a policy that subsidizes some people who are already well off, largely at the expense of people who are less well off. Almost no one regards that as sensible.

The bigger problem, however, is that our concentration on helping students pay off their loans distracts us from dealing with the fundamental cause of their debt trouble—the fact that so many Americans are lured into debt for dubious college education.

I recently wrote about that issue here, arguing that students need but seldom receive good counseling before they commit to debt for college. The old adage that an ounce of prevention is worth a pound of cure applies to the student loan issue. Rather than having the government help students who might be in over their heads with college (and grad school) debts, it would be far better to keep them from getting in trouble in the first place. (Too bad that almost no one in Washington is talking about that.)

The cost to society, after all, is not just the bad loans and forgiven amounts—it’s the resources that are devoted to failed education, including the time students devote to courses in which they learn little and the work of the faculty and administrators in teaching and overseeing them. The visible waste of bad and forgiven loans is just a fraction of the total waste we endure by subsidizing college.

When the GAO reports that the taxpayers are going to be giving away more than $108 billion on student loan forgiveness, it’s no doubt correct. That is a great deal of money that could be used for other priorities (or reducing our ever-expanding debt). The full cost of our student lending folly is, however, far greater.

  • DrOfnothing

    Leef’s articles, these days, almost invariably rest on one particular argument: college education is not especially useful for a significant majority of those who pursue it, therefore we, as taxpayers, should not underwrite. Besides contradicting the majority of the evidence about the wide lifetime income gap between those with and without college degrees, this leaves unanswered a very fundamental question that Leef has never addressed.

    Without a college education and the employment opportunities it provides, and with the wide decline of high-skilled manufacturing jobs, what will be the pathway by which hard-working working-class men and women can hope to lead productive and more fulfilling, and through which they can contribute to the economic development of their communities and their nation? Regardless of the counter-propaganda campaign being waged by Leef, the PC, and other right-leaning advocates, the overwhelming weight of evidence both in the US and globally points to the benefits of education across the board, from earnings and family stability to health.(http://ww2.prospects.ac.uk/cms/ShowPage/Home_page/Labour_market_information/Graduate_Market_Trends/Beyond_the_financial_benefits_of_a_degree__Autumn_05_/p!eXeLcmm#Graduate job quality; http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/)

    So, if not education, then what?

    Some exceptions aside, the vast majority of students who benefit from these policies are from the lower income brackets. The cost, on the other hand, is covered largely by taxpayers in the higher income brackets. Leef’s proposed policy would greatly harm the working-class, solely for the tax benefit of comfortable or well-off. Until Leef can provide an alternative, this will remain a stance that no one who supports the wellbeing of the majority of working-class North Carolinians should advocate.

    • Glen_S_McGhee_FHEAP

      Ten years ago WSJ ran a story on run-away growth in advanced degrees, MBAs, JDs, etc.

      “Why It Takes a Doctorate To Beat Inflation,” (WSJ October 19, 2006; Page A2). http://www.wsj.com/articles/SB116120933184396894

      David Wessel described a massive expansion of higher-level degrees and commented on the worsening economic prospects of those ‘left behind,’ without degrees, those in the lower echelons of society.

      Wessel ended with a prophecy: that this “is the kind of shift in the tectonic plates of the economy that produces political earthquakes.” Indeed!

      Even Obama admits it. “…at some point, when the problem is not just Uber but driverless Uber, when radiologists are losing their jobs to A.I., then we’re going to have to figure out how do we maintain a cohesive society and a cohesive democracy … where the links between production and distribution are broken, in some sense.”
      http://www.newyorker.com/magazine/2016/11/28/obama-reckons-with-a-trump-presidency (BTW great article)

      This is the problem statement. Solutions are unavailable at this time. It really is a matter of figuring out how to maintain a cohesive society with 20/30/40 unemployment, as sociologists Collins/Wallerstein/Mann/Calhoun predict in the near future.

      Mass producing credentials only creates clouds of worthless confetti, and, worse, intensifies the kind of educational stratification that Wessel warned us about. For every upper level graduate degree produced, an undergraduate degree loses value.

      “The major problem of education is basically stratification. Not everyone does well because basically this is a system of getting credentials and some people are going to get the best jobs out of this. The more people compete the more inflationary it is. I haven’t seen a single politician who has figured that out. Maybe it’s intractable. Maybe nobody wants to think about this. Okay, let’s get all the lowest students better, so what? So they will all become Ph.D.’s in physics? Or will it just be that you need a Ph.D. to get a job at McDonalds? I think it’s a major issue of stratification in the future; it deserves more analysis.” Randall Collins

      • DrOfnothing

        This is where some type of viable union movement would have helped. As Germany and, to a lesser extent, France have proven, it’s the best defence against casualization and de-skilling. But it would need to be a different _kind_ of union. In the UK, the service unions remain quite strong, hence relatively high minimum wages and a (for now) still functioning social safety net. Let’s face it, we’ve got decades of evidence that trickle-down economics simply don’t work–just look at the stagnant median income in the US for evidence.

        • Glen_S_McGhee_FHEAP

          Very accomplished graphics in the videos. The ideas, not so much. But they are right, something has to give. Collins/Wallerstein/Mann/Calhoun propose an oscillating 100 year cycle between capitalism and socialism, but they are just guessing too.

          Yes about Germany, Hal Hansen is fascinating on this: http://files.eric.ed.gov/fulltext/ED433292.pdf
          But you will notice, the blueprint for German occupational structure and education was set in place more than one-hundred years ago. This makes all the difference. Hansen contrasts this with the USA. I have no knowledge about France.

          My guide to “unions” (George Leef has written about the contemporary, nefarious unions, not the social units that functioned at the start of the industrial revolution in the US) is David Montgomery, The Fall of the House of Labor. Interesting guy, started out as a union organizer, but the FBI kept shutting them down so he decided he needed to get into something else.
          https://en.wikipedia.org/wiki/David_Montgomery_(historian)

          Best Wishes in the New Year!

          • DrOfnothing

            Same to you, sir! I’ll read more on Montgomery. My hope for 2017 is that it is profoundly, crushingly boring. I think, after the turbulence, violence, and vitriol of 2016, we could all use a break to catch our breath and perhaps start to listen to one another again rather than simply plugging our ears and shouting slogans.

  • Glen_S_McGhee_FHEAP

    Here is a GAO Report about when social security benefits are garnished due to unpaid student loans. I know of one such case.
    http://www.gao.gov/assets/690/681722.pdf

  • Glen_S_McGhee_FHEAP

    Apparently, Ted Mitchell is curbing PSLF, and the ABA is suing.

    https://www.americanbar.org/content/dam/aba/images/abanews/PSLF_filing_122016.pdf

    What do we make of this new development, I wonder.