But a student loan is also a contract, an agreement made between a lender and a borrower. If government was to wave its magic wand, as many in and out of the Occupy Wall Street movement demand, and wipe the ledger clean for millions of borrowers, who will help the lenders?
A truly disturbing bill has been introduced in the House of Representatives to “forgive” student debt after a period of time.
“After 10 years of repayment, you should be able to save and make other investments in your life, but now increasingly what you get is a nightmare,” says Michigan Democratic Rep. Hansen Clarke, the author. “It undermines American competitiveness when those best suited to start a business or buy a home can’t because of student debt. Freeing up $500 a month for millions of people over decades is real stimulus. The student debt bubble won’t burst the way the housing bubble burst, because the Treasury backs most of the loans, but crushing personal debt is a slow-burning social crisis that’s robbing people of their American dreams.”
First, “forgiveness” can only be granted by a party who was wronged; in this case, the federal government didn’t make the loans (though it backs them — more on that in a moment). Only the banks can “forgive” loans. If the government demands they write off billions of dollars of future income, the banks won’t be unaffected.
Next, Clarke claims the Treasury Department backs most loans, so we can all sleep peacefully, confident no bubbles will be bursting.
That’s magical thinking; the Treasury Department can only repay those loans with either our tax dollars, or cheaper dollars it prints itself. When the bill comes due, we’ll pay for it either with much higher taxes or recovery-killing inflation.
The student loan industry is hugely profitable. And like the mortgage industry, it is protected from its own bad decisions by government coffers. This simply re-creates the problem in the housing market; it’s called “moral hazard.”
“Federally subsidized student loans are handed out to millions of college students regardless of risk — let alone whether they can handle college-level work,” notes Mike Brownfield of the Heritage Foundation. “Thanks to taxpayer backing, the loans are offered at rates far below what private lenders would offer. When the students can’t afford to pay, the American people are stuck with the bill.”
If loans were returned to the private sector and government guarantees removed, lenders would have incentive to start thinking like businessmen again. At some point during the process, someone might actually ask the question, “how will you pay this back?” It’s a fair question, and forcing a student to answer might make him or her rethink that crypto-zoology major.
Those free-market incentives would also force colleges and universities to reassess their costs. According to a new study by Salon.com, universities in Britain cost no more than $14,000 a year. And the best schools in Canada cost just $6,000 annually.
Government loans (and government guarantees) have done nothing but drive up costs in the U.S.
As Brownfield reports, “Pell grants have increased 475 percent since 1980, and yet the cost of attending college has increased 439 percent since 1982.”
Forgiving student loans would do nothing about those costs. It would merely pass the costs along to the rest of us.