Student Loan “Reform”: Costly for Students and Taxpayers

June 13, 2014

By Eric Peterson

On Monday, President Obama singed yet another executive order, this time it was the “Pay As You Earn Program.” The program is the cornerstone of the administration’s attempt to “help” address the problem of rising student loan debt.  Unfortunately for taxpayers and for students, it will do little to make college more affordable and nothing to expand job opportunities for recent graduates — while continuing to prop up costly student loan programs.

“Pay As You Earn” caps monthly loan payments at 10% of discretionary income, and “forgives” all outstanding loans debt if the borrower works 10 years in public sector or non-profit – effectively pushing unpaid debts on to the backs of taxpayers. Although this is a sweetheart deal for current student loan debtors, the President’s “Pay As You Earn Program” does little to fix the underlying problems with student debt.  While paying off student loans has presented challenges for many a college graduate, the current state of the economy has made it next to impossible.

That’s because College graduates who are assuming mountains of debt to finance their education are having an extremely difficult time finding employment in the President’s sputtering economy.   More than 50% of recent college graduates are either unemployed or underemployed and according to the Bureau of Labor Statistics – with 48% of employed college graduates working in a job that doesn’t require a college degree.  In other words, college grads are struggling to find work in a “throwback” economy – one that has “recorded some of the worst labor participation rates for 20- to 24-year-olds since 1973, when the Vietnam War was beginning to wind down”.

These job prospects are especially disheartening when you consider that average student debt sits at $23,300. Worse, the aggregate amount of outstanding student debt has reached nearly one trillion dollars.  And that’s not all.  Since 2004 student loan debt has ballooned by 281 percent. This massive student loan bubble has been a major factor to the skyrocketing tuition costs in recent years, creating a cycle where students take on more debt to finance their education.  Government measures seeking to make college more “affordable” have only succeeded in pushing college graduates further into debt.

Students aren’t the only ones suffering as a result of these failed policies.  Using Fair Value accounting standards, the 4 government student loan programs will cost taxpayers a whopping $88 billion over the next decade.  This is a far cry from the $135 billion claimed to be returned to taxpayers by the standards set forth by the Fair Credit Reporting Act.

Once again, a well-intentioned government policy has wrought negative consequences for both taxpayers and college students. Rather than providing more taxpayer dollars and bigger government programs to deal with this debt problem, the government should take a step back and let private institutions and market forces play a greater role in the area of financial aid.

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