April 24, 2014

HIGHER EDUCATION BUBBLE UPDATE: Telling Students to Earn Less: Obama now calls for reforming his bleeding college loan program.

The federal student loan program is becoming so costly to taxpayers that even President Obama is pretending to fix it. Readers will recall Mr. Obama as the man who has spent much of his Presidency expanding this program, creating new ways for borrowers to avoid repayment, and then campaigning about these dubious achievements on campuses nationwide.

Now Team Obama is acknowledging that his policies are turning out to be more expensive than he claimed. Participation in federal debt-forgiveness programs is surging. In a mere six months the number of borrowers who’ve signed up for such plans has increased to more than 1.3 million from less than a million, with total balances rising to $72 billion from $52 billion. Maybe the White House didn’t understand that when you give people an economic incentive not to repay a loan, more people won’t repay.

Plus this:

Pay As You Earn allows students under certain circumstances to borrow an unlimited amount and then cap monthly payments at 10% of their discretionary income. If they choose productive work in the private economy, the loans are forgiven after 20 years. But if they choose to work in government or for a nonprofit, Uncle Sugar forgives their loans after 10 years.

For aspiring community organizers who go to college and then grad school before moving into a job that the government defines as public service, the forgiven debt can be $150,000 or more, courtesy of the taxpayer. And unlike with some other federal programs, when the government forgives the debt of one of the exalted class of nonprofit or government workers, the do-gooder doesn’t have to report it as income to the IRS. Who wouldn’t want to pick up $150,000 tax-free?

Energized by Mr. Obama’s 2011 expansion, Pay As You Earn has been a slow-motion bailout for law schools, which saw diminishing applications in the wake of the financial crisis. Now the money is still rolling in thanks to more leveraged students. Upon graduation the median law school grad in 2012 was carrying more than $128,000 in grad-school debt, up from $77,000 in 2004.

But how much of it will ever be repaid? At least one creative school, Georgetown, last year offered to pay the students’ monthly bills under the Pay As You Earn program while simultaneously raising tuitions. This essentially makes taxpayers pay the entire cost and turns the loans into six-figure grants.

Next scam: Law schools start “nonprofit” law firms that hire their own graduates, thus boosting their U.S. News rankings by ensuring their grads have jobs while letting their students get out from under debt in half the time. Plus, faculty can have high-paying side jobs managing things at the “nonprofit.”

Actually, that doesn’t sound bad. Did I say “scam?” I meant, “public service opportunity.”