Inside Financial Services

The Federal Student-Loan Money Pit Keeps Getting Deeper

This time, by $20 billion

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President Obama’s recently proposed budget has been widely dismissed as “dead on arrival,” since the Republicans control both houses of Congress. But it’s not completely dead. Politico has the story:

In obscure data tables buried deep in its 2016 budget proposal, the Obama administration revealed this week that its student loan program had a $21.8 billion shortfall last year, apparently the largest ever recorded for any government credit program.

The main cause of the shortfall was President Barack Obama’s recent efforts to provide relief for borrowers drowning in student debt, reforms that have already begun to reduce loan payments to the government. . . . The $21.8 billion revision—larger than the annual budget for NASA, or the Interior Department and EPA combined—will be tacked onto the federal deficit. [Emph. added]

So by the stroke of his pen—that is, by unilaterally easing the terms of the education loans the government doles out—President Obama has single-handedly boosted the budget deficit by over $20 billion. That’s not a trivial amount, by the way. It adds up to fully 5% of this year’s expected budget deficit. Wonderful!

This is just the latest indication of what a travesty the government’s higher education loan program has become. On the one hand, the government is happy to provide education loans (read: “saddle young people with massive amounts of debt”) to anyone who wants one. The government engages in exactly zero risk underwriting in the process, by the way, so that it knows for certain that it’s giving money to people who won’t be able to pay it back.

And then because the government is handing out so much money to so many young people, the higher-education industry is choked with students, and is churning out many more diplomas than there are jobs available that actually require them. End result: too many students are weighed down with too much debt—and then can’t find jobs that pay enough to service it. Who gets to pay for this mess in the end? Why, you do! And your bill just rose by $21.8 billion. (And by the way, expect the bill to go higher. The cost of higher education has risen at four times the rate of inflation over the past 40 or so years.)

This is ridiculous. If the CEO of a bank in the private sector presided over a sudden $21.8 increase in his bank’s loan losses, he’d be immediately fired by his board, and likely hounded for years by suspicious regulators. And rightly so. Now that I think of it, critics of the banking industry accused subprime lenders of engaging in the very same behavior the Education Department is now doing—handing out money to people they know won’t be able to repay it—and are still demanding that the people who ran those lenders be thrown in jail. Yet any improper lending mortgage lenders did is nothing compared to what the Education Department is up to now.

The ideal solution to this mess would be for the federal government to get out of the education-finance business altogether and then stay out. Once the firehose of federal tuition dollars is turned off, colleges and universities will magically find ways to whack away at their bureaucracies, get rid of bogus majors, cut costs generally. Annual tuition increases would suddenly turn into annual tuition decreases and sooner or later college would actually become affordable again.

But don’t expect that to happen anytime soon. As long as a president (any president) has the power to unilaterally give away freebies to voters the way President Obama is doing now, the price tag to taxpayers will only go up.

What do you think? Let me know!

6 Responses to “The Federal Student-Loan Money Pit Keeps Getting Deeper”

  1. North Left Coast

    Let’s see, college tuition rising 4X inflation. Colleges lobby the Feds to get into the Student Loan Business (putting private student lenders in a no-win situation). The Fed Student Loan Program is a disaster (zero risk lending, no standards, now huge write-offs). Colleges now complain they are overwhelmed with applicants. Students can’t repay their loans because they are all getting degrees that have no useful economic value.
    Makes me think of the old adage — Crime wouldn’t pay if the government ran it! Seems the same holds true for higher(?) education.
    Excellent work, Tom.

  2. Hoofin

    Fine, Tom. Where does that loan money end up? In university endowments. Time to tax endowments greater than $100 million in value. Why do these schools need to be sitting on a slush fund, when they are so hooked up to sugar daddy Uncle Sam as you are saying?

  3. George Watson

    Yes, the introduction of “competition” into the higher education place will only make it better – and it might also give e few professors a nice lesson in “capitalism”, a notion foreign to many of them.

  4. Marshall Laitsch

    As someone who took out student loans in the 70’s as did both of my daughters in the 90’s and who paid back every last dollar as did my daughters, I am outraged at this additional government “give away program”. How are these current and future generations supposed to accept their responsibilities?

    • Chicago

      Well said. I’ve been saying the same thing forever and I get goofy looks from people these days. Where did our morals and responsibilities go?

  5. Dawid

    As a commercial ldeenr myself, I find myself recommending this book both to prospective borrowers as well as to some branch managers who may be rusty on the Small Business Lending process.This book gives easy to understand explanations and rationales behind some of the confusing things banks ask their borrowers to do. It gives simple examples and descriptions that help me interpret the process to my customers.Even after many years of lending money to companies, I find myself reaching for it to remind me of little details I have forgotten. It is well-written and very useful. I would suggest the author update to include credit scoring issues which are now common in the Small Business Banking arena.

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