The Congressional Budget Office (CBO) recently released a new assessment of the cost of the federal government’s income-driven repayment (IDR) plan for student loans. The numbers are depressing. The federal government expects to write off $207 billion in student loan debt in the next decade.
How did we get here? Back in the 1960s, based on the notion that going to college is a good investment and hoping to level the playing field for minorities and the poor to go to college, President Lyndon Johnson signed the 1965 Higher Education Act. It lets the government guarantee student loans made by private financial institutions, essentially putting all risk on the shoulders of taxpayers.
President Richard Nixon followed with the Higher Education Act of 1972, which codifies the system we have today: students can get a combination of grants and loans from the federal government to pay for college. The 1972 act also established Sallie Mae, a government-sponsored enterprise. Sallie Mae was authorized to borrow from the U.S. Treasury at below-market rates to purchase federally guaranteed student loans from banks, thus freeing capital so private banks could make even more student loans.
There is no academic criteria to prevent anyone from getting a student loan because college debt has become an entitlement available to all. There is also no concern about dropouts and the borrower’s ability to repay.
With this abundant supply of cheap taxpayer money, the demand for college went up, so colleges raised tuition and fees, which then caused Congress to increase student loan limits and grant amounts. This vicious cycle keeps repeating itself as colleges become more and more expensive and the outstanding student loan debt has increased. Pell Grants today cover less than 30 percent of college tuition and fees, even though they used to cover 80 percent in 1975.
It’s Other People’s Money, So Who Cares?
The federal student loan program has enriched Sallie Mae, private banks, and colleges, but exposed U.S. taxpayers to enormous financial risk. Undeterred, President Clinton decided to get the federal government even more involved in student lending by having the U.S. Department of Education launch a Direct Loan Program in 1993.When President Obama came into office, he decided that a federal government takeover was the best way to fix the student loan problem. In 2010, the President signed the Health Care and Education Reconciliation Act (HCERA) Act, which kicked private lenders out and made the federal government the only issuer of all federal student loans.
We were told the federal government takeover would “put an end to wasteful subsidies to banks and used much of the more than $40 billion in savings to strengthen college access.” The CBO even projected in 2012 that the federal takeover would generate a $219 billion profit over a decade.
The HCERA Act also offered the income-driven repayment (IDR) option to help student borrowers manage repayment. The IDR capped monthly student loan repayments at 15 or 10 percent of income for borrowers after 2014, and made taxpayers pay the rest of their tab after 20 years.
President Obama sweetened the offer further by announcing a “Pay as You Earn Plan,” which allowed about 1.6 million students to take advantage of IDR as early as 2012. People who work in government jobs will see any remaining debt paid entirely by taxpayers after 10 years.
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