A Somewhat Bizarre Presidential Proposal On Student Loans

Barack Obama came to office promising universal healthcare, to end the carbon economy, and to fix education.

Numbers one and two were clear enough, but we’ve never gotten too much insight into number three, beyond Education Secretary Arne Duncan’s “Race to the Top” program. (The latter is essentially a remake of No Child Left Behind.)

On the finance side, the student loan industry is populated by Citigroup, Sallie Mae Inc. of Indianapolis, some other large players and hundreds of smaller ones. A year ago, Obama’s people quietly made clear to people in the industry that they could expect the government to take over their business. That meant specifically that banks and institutions like Sallie would be forced out of the business of providing subsidized finance for student loans.

What’s your obvious move, faced with something like that? You scramble to convince the government that you deserve to become a servicing provider to them, giving up the financing business in favor of a lucrative (and risk-free) business originating loans and handling the payment streams.

That is attractive to the government because it saves them the trouble of standing up a whole new student loan bureaucracy. They’ll still stand up the bureaucracy, of course, but now all they’ll need to do is demand lots of unreasonable reports and audits from the servicers who used to be finance providers.

But why go to so much trouble, on top of kicking in the teeth of yet another private industry?

Some recent reporting may shed light on that question. Obama is apparently getting ready to propose big changes in how people deal with their student loans. Today, people pay their student loans like they pay car loans and mortgages: you owe a fixed amount of money, and you pay a fixed amount per month until you the note matures.
But with student loans, Obama reportedly now wants to put time and income-based limits on how much you have to pay back. Your student loan payments will be capped at no more than 10% of the amount by which your income exceeds a “basic cost of living” amount. And all your debts will be forgiven after 20 years if you work in the private sector, or 10 years if you have a government job.

Higher education is like healthcare in that payments to providers are already heavily subsidized by government. Also like healthcare, the cost of education is rising every year far more quickly than the general inflation rate. Obviously, higher education is an increasingly large burden on middle-class families.

But colleges and universities are also like hospitals and medical practices in another sense: with no built-in incentives to cut costs, they don’t cut costs. That’s the problem we ought to be looking to solve. Instead, Obama wants to create yet another middle-class entitlement that will quickly become permanent, and will permanently enrich a special class (educators) at society’s expense.

Overall, this proposal makes extensive consumption of higher education a no-brain decision. I agree that the middle class is harmed by the skyrocketing cost of higher education. But to repeat the parallel with healthcare, people will automatically use too much of anything they don’t have to pay for.

The right way to solve the problem of rampant education cost-inflation is not to shift the costs to taxpayers, but to make colleges and universities more efficient.

A fuller version of this story appears at The New Ledger.