Should Federal Taxpayers Pay Off Student Loans?

During the 2016 presidential election, the student loan debt of Americans was one of the issues that attracted attention.  Bernie Sanders, for example, advocated for the federal government paying the college tuition of students attending public colleges and universities — with the cost to be covered by a tax on “Wall Street speculators” — and others argued that the federal government should pay off the student loans of college graduates who have found that the real-world problem of paying off their debt is interfering with their ability to follow their dreams.

So, should the federal government pay off student loan debts?  After all, the feds bailed out GM and has helped the big banks, and our politicians have just approved a $1.3 trillion interim spending package — so why not just toss a few billion dollars more onto the national debt load and help out those overwhelmed college grads who are working as waiters or baristas rather than pursuing whatever career awaits philosophy majors?

One of the problems with one-size-fits-all solutions is that, by definition, they do not take into account the important differences that may be revealed if individual circumstances are examined.  That’s where a recent survey of college students comes in.  A company called LendEDU, which operates in the student loan space, polled 1,000 college students at four-year institutions who are receiving student loans — and it found that more than half of them admitted to using their student loan proceeds to pay for spring break vacations.

That’s possible because of the way student loans are administered.  Colleges and universities get the proceeds, take out the tuition costs, and then remit the remainder to the students — who can use it for pretty much whatever they want, including some fun in the sun with their fellow students.  The LendEDU poll isn’t scientific, and of course there are highly responsible college students who aren’t using their student loan proceeds for a frolic and detour on the beach.  Nevertheless, how students actually used their student loans certainly seems like the kind of information we’d want to consider before we decide to pay off their debts.  (And, incidentally, I would apply the same test before bailing out large corporate institutions, too.)

Which of the federal taxpayers among us wants to foot the bill for last Saturday’s excellent kegger?

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Student Loan Scofflaws

The Wall Street Journal recently reported that 43 percent of the people who have borrowed money from the federal government’s principal student loan programs aren’t making payments or are behind on meeting their debt obligations.  The people comprising that 43 percent collectively owe the federal government more than $200 billion.

The figures are stark, and staggering.  3.6 million people who are out of school and in the workforce are in default on their loans — which means they haven’t made a payment in a year.  Another 3 million people are delinquent on their payments, which means they’re at least one month late but not yet a year behind, and another 3 million have received permission to postpone their payments because of some kind of financial emergency.

studentloandebt070313_0The federal government is trying to figure out why payments aren’t being made, and some consumer groups are contending that debt services aren’t letting the troubled borrowers know about available payment options.  Three realities, though, seem pretty clear.

First, many of the people who thought getting a college degree, any college degree, would be the ticket to financial security have learned that they were wrong.  Whatever their major or career plans, there just aren’t enough good jobs out there to allow them to repay their loans.  Second, the feds do virtually nothing to determine whether student loan borrowers are good credit risks — they don’t typically perform credit checks, require co-signers, or evaluate whether the borrower’s intended course of study or capabilities make repayment likely.  And third, once you’re out of college and trying to make it on your own, your student loan debt is the lowest of the debt priorities, behind your home loan, your car loan, and your credit card debt.  What’s the federal government going to do, repossess that diploma that isn’t worth the paper it’s printed on?

It’s not clear whether the federal government’s experience is true for all student loan debt.  If so, that’s a troublesome fact, because the WSJ article also notes that there is now more student loan debt than credit card debt, car loan debt, and any other kind of consumer loan debt.  Student loan borrowers collectively owe $1.2 trillion.  If almost half of the federal borrowers aren’t making their payments, will the same thing happen to that enormous pool of debt?

Politicians love to talk about how everybody should go to college and the federal government should help them do so by making loans available.  That siren song sounds good, but the reality is more uncomfortable.  Readily available student loans have just allowed colleges to jack up their tuitions, and college degrees aren’t a guarantee of a good career and financial success.  College isn’t necessarily for everyone, and struggling students aren’t going to benefit from borrowing tens of thousands of dollars to scrape by and get a degree in a major that isn’t in demand in the economy.   And broken windows theory would tell us that it’s not doing America any good to have a growing body of millions of people who aren’t paying their debts.