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Government Programs Blowing Air into Debt Bubble


Over the past few years, the college cost crisis has evolved from merely an important issue facing parents and students into a serious national problem that could impact the future of the country. Moreover, most government programs designed to address the problem have only made it worse, inflating the bubble by encouraging students to borrow and giving colleges few incentives to lower prices. Federal student loans are the biggest offenders in this regard, but even other, more targeted programs have had this effect.

One of these programs is the public service loan forgiveness program, long touted by President Obama and others as a way for students to reduce their debt through good deeds. In the program, students who work in specially designated public service jobs, usually in the government or nonprofit sectors, can have a portion of their loans forgiven. Students who qualify need only make 120 monthly payments—based on their income, not on the size of the loan—and the balance will be forgiven, no matter how large.

On the surface, this seems like a relatively solid proposal that could seriously lower the debt burden for many grads, but as the San Francisco Chronicle notes, it has actually created a perverse incentive for students to take out large loans they have no intention of paying back in full. This is particularly true for graduate students, who have no limits on the size of the loans they can take out. As a result, the program has gone from “a safety net for undergraduates [to] a very large tuition assistance program for graduate students.”

There are a few serious problems here. First, students who plan on using this program but graduate (or drop out) and are unable to land a “public service” job will be left with a massive debt burden which will not be forgiven and is not dischargeable through bankruptcy. Second, even when everything works as it should, this amounts to a taxpayer-funded subsidy of expensive graduate programs, which is exactly the opposite of kinds of policies we need. But the biggest problem is that it takes the heat off of expensive schools to lower their prices:

Some graduate and professional schools are promoting it as way to afford their lofty tuition. Delisle fears it could keep upward pressure on college costs at a time when President Obama is urging colleges to provide better value.

The problem with this program—and the federal student loan system more broadly—is that it treats the symptoms of the problem rather than the root illness: College is too expensive. We should aim policy at making college more affordable, not making it easier to borrow to meet inflated prices.

[Ball and chain image courtesy of Shutterstock]

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  • Anthony

    “The problem with this program–and the federal student loan system more broadly–is that it treats the symptoms of the problem rather than the root illness: College is too expensive.” Web of conscious and unconscious interests (interests, interests, and more…) nourishes the root WRM.

  • Valerie

    “In the program, students who work in specially designated public service
    jobs, usually in the government or nonprofit sectors, can have a
    portion of their loans forgiven.”

    Paul and Susan graduate from college. Susan becomes a private accountant while Paul oh-so-graciously agrees to take a “public service” job. In other words, Paul’s salary is paid for, in part, by Susan. But now, in addition, Paul will have his loans reduced compared to Susan (with the obvious effect of either raising Susan’s taxes or raising the effective loan repayments of future Susans). And this is supposed to be a “solid proposal”?!

  • Boritz

    Students support these policies with their votes.

  • cubanbob

    Public sector and non-profits should specifically excluded. At best they don’t add any growth to the economy and at worst are a net loss to the economy. In general government should get out of the college financing industry.

    • Kevin

      Agreed. This is just a hidden salary and budgetary increase for the bureaucracy and adds to the burden on the productive sectors of the economy.

    • Diggsc

      As long as there is a revolving door between academia and federal government, there will be federal monies spent to increase tenured professor’s salaries via student tuition.

  • Jacksonian_Libertarian

    Get the meddling government out, nothing beats the free enterprise system at providing the best quality, service, and price.

  • Diggsc

    I gotta say that I love the idea of some starry-eyed Obamabot Leftist signing up for a $250k PhD in some social justice idiocy, and then not being able to land a cushy GS job, and paying off that worthless degree for the rest of their lives. Fully convinced, by their worthless degree, no less, that it’s all society’s fault that they are in financial trouble.

    • bpuharic

      How about all those Regent University law grads given jobs under Bush.

      After all, Regent’s one of the nation’s premier laws schools, and has no agenda, right?

    • teapartydoc

      Problem is the commies will bail them out and keep them on the dole.

      • bpuharic

        Kind of like Romney’s $10M FDIC bailout?

        Who knew the GOP ran a red for Pres!

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