September 19, 2013
HIGHER EDUCATION BUBBLE UPDATE: 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 [the] kinds of policies we need. But the biggest problem is that it takes the heat off of expensive schools to lower their prices.