By George Leef
Our America Initiative Advisory Council Member of Educational Choices
It’s just inevitable – any time the government decides to be generous with taxpayer money, interest groups will start scheming for ways to maximize their take, and politicians will start scheming to get the most political advantage they can from it.
The federal student loan program is an excellent lesson in the political dynamics at work in Uncle Sam’s vicarious generosity. As Andrew Kelly and Kevin James of the American Enterprise Institute write here, the Democrats are trying to seduce college graduates with easy repayment terms for their student loans. Senator Elizabeth Warren has been their point person on this, with her strident populist calls for allowing students to refinance their loans at ultra-low interest rates and covering that cost by higher taxes on – of course – the rich.
Trying to buy votes with easy student loans is every bit as objectionable as buying votes with other giveaways – Obamaphones, Food Stamps, Ex-Im Bank subsidies, and so on. It makes you see the wisdom of the Founders in trying to put strict limits on what the government would be allowed to spend money for.
Helping students pay for education was not an enumerated power of Congress. Unfortunately, in the 1930s, the Supreme Court tore down the intended limits on federal power by ruling that anything intended to improve “the general welfare” was permissible.
But the federal student loan program was being turned into a weapon years before Senator Warren arrived in Washington. Consider the folly of Income-Based-Repayment (IBR), which Congress adopted back in 2007. Students can choose IBR, which means that they will not have to pay more than ten percent of their discretionary income to service their loans. Furthermore, any balance that remains unpaid after 20 years is forgiven.
That seems kindly. Students might, after all, face severe problems if they had to repay their loans.
The problem is that this policy strengthens one of the most damaging ideas loose in America these days, an idea that liberal collectivists have relied upon for decades. It’s the idea that individuals don’t have to be responsible for the consequences of their decisions.
A decision to borrow money – for any purpose – means that scarce resources will go into one use and not others. Even though our federal government may seem to have a bottomless pit of money, it doesn’t. The more we spend on putting people through college, the less we have for other uses. By the same token, of course, the more we spend on, say, subsidies for “green energy” companies, the less we have for other uses.
In ordinary lending, where there are serious consequences for failure to repay in full, borrowers are cautious. They responsibly calculate the likely benefits against the costs and if the costs seem to be greater, they don’t borrow.
Now think about how a rule that borrowers won’t have to pay in full if the investment doesn’t work out affects them. Suppose that the government wanted to encourage people to try entrepreneurship and therefore set up a federal business loan operation under which repayment would be reduced if the business was not profitable and forgiven entirely after some period of time.
Obviously, we would get lots of ill-considered new companies, many of which would repay only a small percentage of the borrowed capital. Ah, but the entrepreneurs wouldn’t be suffering, scrimping, or even driven into bankruptcy!
Income-based repayment of student loans is just the same. It leads young people to think, “Why not give college a try? If it doesn’t work out for me, I won’t have to pay back much.” It encourages them to believe that “the country” should and will cover their debts if they can’t.
Perhaps the deadliest weapon the statists have against America is the idea that “society” must be responsible, rather than each person. The supposedly kind and gentle repayment policies for government student loans are a part of that.