The losses due to loans that can’t be repaid will be covered by the taxpayers
ast year, President Biden decreed that students who have federal college loans would have $20,000 of their debts canceled. That action has been challenged since it usurps Congress’s power of the purse. The Supreme Court will hear arguments in that case later this month.
But the government is not satisfied with just that huge loan cancellation; it also intends to make loan repayments far easier for student borrowers in the future. The Department of Education has announced that it has several “improvements” in mind for its student loan program. Students can already avail themselves of very lenient repayment terms, under which they only have to pay back based on their disposable income – the so-called Income Driven Repayment (IDR) policy.
Many college students borrow substantial sums only to find that they can’t earn enough to handle the monthly payments, but kindly Uncle Sam lets them enroll in IDR so they won’t have to suffer. They can pay the government back what the politicians think is a reasonable amount based on their income. Obviously, this encourages students to be careless in their borrowing. Imagine if mortgage lenders worked that way, requiring homeowners to pay back what they “reasonably” can, suspending payments entirely if their income should decline to the poverty level.
Politicians, of course, don’t have to worry about going out of business like a foolish mortgage lender would. The losses due to loans that can’t be repaid will be covered by the taxpayers.
Congress approved the IDR policy back in 1994. At that time, students could sign up for IDR, paying a maximum of 20 percent of their income for 25 years. Notice that the cap on the time for making payments was unnecessary—once the payments have been adjusted for periods of time when the student has low income, there is no reason to also say that the payments only must be made for a certain length of time. Twenty-five years after graduation, most people are coming into their peak earnings and there is no reason to end payments then.
Since 1994, Congress has made several adjustments in IDR policy, just as you’d expect from politicians who want to be popular with interest groups. Congress limited the amount of earnings that would be counted as disposable income for purposes of loan repayment; only after the student had earned 150 percent of the federal poverty level would he have to pay this percentage. It also lowered the maximum number of years to 20. And it lowered the percentage of income that the student would have to pay to ten.
All very generous with taxpayer money.
Now, the Education Department proposes to make further adjustments in IDR policy. It wants to raise the level of income exemption to 225 percent of the poverty level (which means that those who earn less than about $30,00 per year don’t have to pay anything), while lowering the percentage of that income that must be paid to just five. Also, students will only have to repay for ten years before the remainder of the loan is canceled.
Student borrowers will therefore pay substantially less than before. The Department justifies this by saying that many are struggling with their loan repayments. Some are, but why should the government shield them from the consequences of bad decisions?
Are there any reasons to object to this plan?
I can think of several.
First, it would encourage colleges to increase tuition. As William Bennett, President Reagan’s Education Secretary observed in a 1987 op-ed entitled “Our Greedy Colleges,” the fact that the government makes a lot of money available for use only at approved schools encourages them to charge more than they otherwise would. Reducing the amount that students have to repay will create the same incentive, because students will be less sensitive to the cost of attending college.
In fact, under the Department’s new IDR policy, college would be virtually free for many students. A typical BA holder earns about $47,000 three years after graduation. Under the Department’s low payment percentage and high income threshold, such a student would have to pay only $68 per month. That isn’t even enough to cover the interest on an average loan balance. This will make students even less sensitive to college costs than they are now, and schools will take full advantage of that.
Second, the policy creates a strong incentive to borrow as much as possible for college. Why work during the summers so you won’t need to borrow as much? Why ask family members if they’ll help with college tuition and expenses? Better to borrow all the money from the government and then repay only a small fraction of the expense.
Third, the policy is likely to reduce the level of effort that students put into their college work. That’s because human beings tend to care less about things they get for free than for things they are personally invested in. Economist Aysegul Sahin, in a paper published by the Federal Reserve Bank of New York concluded that “[A] high-subsidy, low-tuition policy causes an increase in the ratio of less able and less highly motivated college graduates. Additionally, and potentially more importantly, all students, even the more highly motivated ones, respond to lower tuition levels by decreasing their effort levels.”
As it is, many students largely coast through college, learning little of value and having a good time. For many, college is four or more years of Beer and Circus, as Indiana University professor Murray Sperber put it in a book published in 2001. The Department’s proposed changes will exacerbate this problem. And as more students graduate with poor skills, the underlying problem — that many can’t earn enough to repay their loans — gets worse.
In typical government fashion, we have a proposed solution that creates new problems.
Fourth, there is a strong legal objection to the Education Department’s making changes to IDR policy. Under Article I of the Constitution, all legislative authority is vested in Congress. Executive branch agencies have no authority to remake policy that has been set by Congress.
The intention of the Founders was to ensure that laws were only made by the people’s elected representatives, not by the president or his minions. The Supreme Court used to protect against violations of that division of authority with its Nondelegation Doctrine, holding that Congress had to make the laws and could not delegate that responsibility to the executive branch.
Unfortunately, the Court ceased enforcing the Nondelegation Doctrine following FDR’s threat to “pack” it in 1937. Thereafter, the Justices turned a blind eye to the steady growth in power of federal agencies, allowing them a free hand to make laws, calling them “regulations.” It should never have done so, and last year it apparently signaled a change of direction with its decision in West Virginia v. Environmental Protection Agency. The Nondelegation Doctrine seems ready for a revival.
If the Education Department’s proposal is implemented, citizens and taxpayers will feel some serious consequences. They will have to bear more of the cost of college loans, they will have to suffer higher costs themselves if they choose to attend college, and the country will experience further declines in the efficacy of postsecondary education. Certainly, it should be up to Congress to debate the costs and benefits of changing IDR policy. Bureaucrats in the Department of Education should not be allowed to impose this new policy on the country.
One last thing. Can you find any language in the Constitution saying that the government is authorized to lend money to anyone? I can’t.
Originally published by the American Institute for Economic Research. Republished with permission under a Creative Commons Attribution 4.0 International License.
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