Last Year’s Higher Education Reform by the Obama Administration

President Obama’s proposal to address the rising costs and other problems of higher education has occasioned a fair bit of commentary. (See for example this interview with Richard Vedder.)

Relatively little commentary, however, has been directed towards an actual program that was finalized last year. Here is a summary:

[T]he government issued the final regulations for the new Pay As You Earn student loan repayment plan, an initiative of the Obama administration. 77 Fed. Reg. 66088….Although the regs are quite complex, the bottom line is this:

Graduates currently in school or who graduated last May who DO NOT do public service work need not repay more than about 7% of their income toward their federal (that is, federally guaranteed or federally-issued) student loans, for 20 years. After 20 years, all remaining principal and interest is forgiven.

Graduates who perform 120 months of public service (at least 30 hours a week for any federal, state, or local government, or any 501(c)(3) organization) get forgiveness after 10 years instead of 20 years.

There is quite a bit that is questionable about this, but let me just mention two aspects. First, it is not clear why there should be further subsidies of students who have borrowed money. Yes, the loans are large, but should the government really be subsidizing students who tend to come from higher income families and who will be earning more than the average person?

Second, and more important, what justifies a special privilege for students who go into public service? In some cases, salaries may be lower, but working conditions and job security are better than in the private sector. Moreover, why would we want to have further subsidies for government workers? It is hardly clear that the public interest is promoted more by the government than the private sector and the public sector already has a large number of subsidies provided to it.