New Loan Program Encourages Irresponsibility

President Barack Obama recently (October 26, 2011) announced a new federal initiative to make college more affordable. Under the President’s proposed plan, student loan payments would be capped at 10 percent of discretionary income and students would be responsible for payments for a maximum of 20 years. Any remaining debt after 20 years would be “forgiven” by the loan holder. Under his plan, that is us, the American taxpayer. The White House has argued that such a program will make college more affordable and provide those with loans some financial relief all the while resulting in additional costs to the American taxpayer. This is one of those, as it seems, no brainers that all should be able to rally behind.


Who, however, are the real “winners” with such a national policy? There is little doubt that reducing monthly payments for student loans and limited the liability period to 20 years will result in a net savings for many. The value of rewarding those who take on more debate than they can afford may be open for debate, but this relief is really merely a secondary “benefit.” The real winners are private universities and colleges, their presidents, and their boards of trustees. There have been rumblings for years in private universities that the costs are simply getting too high. That the consequences of student loan payments will simply make private universities far too inaccessible for far too many, a fear that may cause a day of reckoning within those institutions to make tough choices about what is really important. President Obama’s recent announcement provides a tremendous relief for all of this institutional soul searching. The President, for example, has promised that the federal government will, in essence, underwrite the costs of private universities. I am sure there are university presidents all over the country now taking huge sighs of relief.

If I am a high school senior who now has a choice to go to a private institution, student loan will now drop down on my list concerns. In the end, who really cares if one assumes $25,000, $50,000, $100,000, or even $200,000 in loans? One’s financial liabilities are fixed under this plan. Arguably such a plan penalizes those who opt for a more “affordable” institution as those who take on more student loans clearly benefit more from this program. Two graduates, one with $25,000 and the other with $100,000 in loans who graduate making similar salaries will essentially be on the hook for similar maximum monthly payments.

Had the President really wanted to make meaningful change to the student loan system, a few more modest changes might be advisable. First, expand the use of subsidized student loans that do not accrue interest while a student is in school. As someone who spent more than a few years combined in both my undergraduate and graduate programs, I was shocked and dismayed to see the impact of interest to my total student loans when they were consolidated. Second, cap interest rates in a way that both generates income for the American taxpayer for their generous support but also communicates to students and their families that education is important to the American people. Finally, consider creating a “federal max” for student loans that will force students and their families to make tough decisions about the value of education.

It is dangerous to communicate to younger adults that they should not be concerned about what financial obligations they commit to; that the government will simply “bail you out” if you borrow irresponsibly. Bail outs breed irresponsibility, at the corporate or individual level. This program will do nothing to reduce the costs of higher education. That is something the marketplace needs to figure out. Someone should explain to the President that there is a real “cost” to forgiving student loans, a cost that gets paid by taxpayers. Good or bad, this cost is real and must be acknowledged. As one of the chumps who is 10 years into a 30 year student loan repayment schedule, back to work to pay off those loans. Like many Americans, however, I am thankful someone took a chance on my education.