President Obama’s plan to “make student loans affordable” is missing the point entirely. Student loans are not the problem — college costs are. And the president’s plan will only cause those costs to skyrocket.
“The plan will cap borrowers’ repayments at 10 percent of their monthly income, officials said, expanding on a 2010 law and providing relief for about five million people who took out loans before October 2007 or stopped borrowing by October 2011,” CNN reported on Monday. “The executive action takes new steps to ‘further lift the burden of crushing student loan debt,’ the White House said, and is part of Obama’s effort to circumvent Republican opposition in a midterm election year.”
Also, the plan assures borrowers that after 20 years (or 10 if they go into public service), any remainder of their loans will be “forgiven.”
Two points to make here. First, student loan debt is crushing. It’s a drag on the economy and it’s putting the lives of too many young people on “hold” as they find they can’t get financing for home ownership because of their college loans.
Second, the plan is relatively limited —for now. But bills have been filed in the House and the Senate that would vastly expand the plan to apply to pretty much everyone.
Here’s why the plan is a bad idea, even for college students.
The laws of economics don’t change. The market forces that would help solve the real problem — the cost of college, not the cost of the loans to pay for it — are further stymied by the president’s plan.
What market forces are those? Competition, for one. When students no longer have to worry about their student loans being a problem after they graduate, they won’t feel the need to shop around. When colleges can be confident that no matter how high they hike tuition, the federal government will ensure that no one’s loan payments are burdensome, then the sky is the limit.
Choice is another market force at work. Students make important choices in what they study and what they major in, and one thing they factor in is future job prospects. It’s a fact of life that a business degree will result in higher earnings than a degree in medieval poetry. That’s not to say medieval poetry isn’t important, but choices have consequences. When students are shielded from such consequences, can we expect them to make better choices?
The president’s plan also is a blow struck against real reform, such as the “$10,000 degree” plan offered by public colleges in Texas and several other states. When students can rely on an eventual bailout by the federal government, why should they be interested in a less-expensive degree?
If we as a society want to offer college as a right — similar to K-12 public education — then let’s have that conversation.
But that’s not the conversation we’re having now. The president’s plan won’t truly help college students, because it won’t bring down costs of going to college.
That’s just Economics 101.