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Unfunded Future Forgiveness

This weekend The New York Times presented an article about the current structure of student loan programs. Briefly: because of changes and tweaks to preexisting law, student loan payments are capped at ten percent of income, and debtors are eligible for nontaxable loan forgiveness on the balance after twenty years, or after ten years if they have a government or public interest job.

The enthusiasm of the Times reporter for this development slights three major problems with it. First, differential forgiveness could distort choices in the labor market, to the disadvantage of the private sector. I have nothing against government or public interest work, and my job might even be classified as the latter.  But I am unaware of any evidence that private sector jobs do less good.  Rather, people work in the private sector to exploit opportunities to provide goods and services that other people value and want to pay for.  Nor is there evidence that government and public interest employees are generally paid less than a market wage, or the “going rate” for their work, which may in fact provide more security or confer greater autonomy than comparable jobs in the private sector.  As a result, the differential terms for loan forgiveness could lead people to favor work in the public sector or in the public interest over private sector work that would otherwise be in their own private interest.  Moreover, there is something expressively troubling about the government determining what jobs are in the public interest. The remedy here is clear: the new Republican Congress should end this differential treatment.

Second, more favorable terms for student borrowing takes away pressure on educational institutions to cut costs. Thus, some of the primary beneficiaries of this program are not students, but professors and college administrators. This fact provides an excellent example of government transfers that are not apparent on their face.  The most direct remedy here—price controls for educational institutions—is surely worse than the disease.  But, to the extent that loan programs  raise tuition, their generosity is called into question.

Third, I worry that the costs to the government of future loan forgiveness are off budget and may be substantial.  Collectively Americans hold more than a trillion dollars in student debt.  About 10 percent of recipients of student loans are now taking advantage of the these new loan terms and more  are likely to do so.  Financing higher education is a challenging social problem, but since 2007 Congresses have taken the easy way out by hiding the costs of their solutions and sloughing them off to the future.  The new Republican Congress needs either to cut back sharply on the forgiveness program or pay for its expected costs now.

Reader Discussion

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on January 28, 2015 at 12:48:54 pm

" As a result, the differential terms for loan forgiveness (COULD) lead people to favor work in the public sector or in the public interest over private sector work that would otherwise be in their own private interest. "

could ? - I thought that was the point of the whole exercise! Grow your voter base and those dependent upon government and / or those who will continue to espouse greater government.
Simply another take on Dalrymple and Ealy's essays this week here at LLB.

Meanwhile let the knuckleheads in the private sector (such as remains of it) pay for it. Hey maybe we can term it (in the manner of today's fashion) "Agency privilege" - Oh, and please check that privilege at the door!

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gabe
on January 29, 2015 at 08:46:02 am

[…] Unfunded Future Forgiveness […]

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Higher Education and the Long Arm of the Law, Part I - Freedom's Floodgates
on January 29, 2015 at 11:42:23 am

The student loan program is a titanic scam, as is the notion that everybody must shuffle off to college in order to be truly educated. The blather about increased complexity and technology is pure folderol. Most students don't go within miles of the more scientific, mathematical curricula and in any case the colleges have softened the programs. But of course raised the price. However the prospects of obtaining a grounding in America's history of racism and oppression offset somewhat by the supposedly benign prospect of a regulatory, increasingly powerful central State, in the right hands it goes without saying, is the new Nirvana, the god the 'little' people can gape at and place their misguided hopes in. Sad.

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john trainor

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.