The Plan For Universities to Raise Tuition to Infinity
Via the WSJ, President Obama is proposing debt forgiveness for student borrowers
The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.
The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.
Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven.
Already, it's pretty clear that many students pay little attention to size of the debt they run up. Easy loans for students have essentially made them less price sensitive, however irrational this may seem (did you make good short - long term trade-offs at the age of 18?) As a result, tuition has soared, much like home prices did as a result of easy mortgage credit a decade ago. The irony is that easier student debt is not increasing access to college for the average kid (since tuition is essentially staying abreast of increases in debt availability), but is shifting student's future dollars to university endowments and bloated administrations. Take any industry that has in the past been accused of preying on the financially unsophisticated by driving them into debt for profit, and universities are fifty times worse.
So of course, the Progressives in the White House and Congress (unsurprisingly Elizabeth Warren has a debt subsidy plan as well) are set to further enable this predatory behavior by universities. By effectively capping most students' future financial obligations from student debt, this plan would remove the last vestiges of price sensitivity from the college tuition market. Colleges can now raise tuition to infinity, knowing that the bulk of it will get paid by the taxpayer some time in the future. Just as the college price bubble looks ready to burst, this is the one thing that could re-inflate it.
Postscript: By the way, let's look at the numbers. Let's suppose Mary went to a top college and ran up $225,000 in debt. She went to work for the government, averaging $50,000 a year (much of her compensation in government is in various benefits that don't count in this calculation). She has to live in DC, so that's expensive, and pay taxes. Let's say that she has numbers to prove she only has $20,000 left after essential living expenses. 10% of that for 10 years is $20,000 (or about $13,500 present value at 8%). So Mary pays less than $20,000 for her education, and the taxpayer pays $205,000. The university makes a handsome profit - in fact they might have given her financial aid or a lower tuition, but why bother? Mary doesn't care what her tuition is any more, because she is capped at around $20,000. The taxpayer is paying the rest and is not involved in the least in choosing the university or setting prices, so why not charge the taxpayer as much as they can?
Postscript #2: It is hard to figure out exactly what Elizabeth Warren is proposing, as most of her proposal is worded so as to take a potshot at banks rather than actually lay out a student loan plan. But it appears that she wants to reduce student loan interest rates for one year. If so, how is this different from teaser rates on credit cards, where folks -- like Elizabeth Warren -- accuse credit card companies of tricking borrowers into debt with low initial, temporary rates. I find it a simply astounding sign of the bizarre times we live in that a leading anti-bank progressive is working on legislative strategies to get 18-year-olds further into debt.
