The Brookings Institution just threw another log on the smoldering student loan problem.
In a recently published report by its Brown Center on Education Policy, the institution sets out to estimate what the various government relief strategies for student loans might end up costing taxpayers.
The news isn’t good.
The BCEP estimates that the price for these programs is likely to be much higher than originally thought, especially if many more borrowers seek to take advantage of them. To drive that point home, the center’s admittedly back-of-the-envelope calculation suggests that a universally adopted Pay As You Earn relief plan alone could end up spilling $14 billion in red ink each year.
To be fair, it is hard to project the long-term costs for programs that are subject to fluctuating influences — such as future earnings (on which the relief plans are based), the rate of inflation for higher education costs, relief-plan enrollment levels and other factors. Still, the center manages to propose some tough solutions to the legitimate concerns it raises.
The Pitfalls of Forgiveness
The government has established a variety of relief programs in an effort to help student-loan borrowers who are struggling to make ends meet. For example, the Income Based Repayment and PAYE plans each reduce monthly payments by extending the repayment durations of the original 10-year terms that are par for the course.
There’s also an added benefit.
Unpaid principal balances are forgiven after 25 and 20 years for the IBR and PAYE plans, respectively, and after 10 in the case of the Public Service Loan Forgiveness program. The think tank believes this benevolence engenders “moral hazard” by encouraging students to borrow to the hilt with the expectation of dodging what remains of the entire bill later on. It’s also concerned that all this would do little to reverse the spiraling cost of higher education.
The center recommends replacing the “forgiveness” feature with favorable tax policies that inspire students to choose careers in public service and increasing Pell Grant funding to support the financially underprivileged. The Obama administration has also weighed in with a proposal of its own to cap the amount of debt that would be eligible for forgiveness at $57,500—all ideas that deserve more discussion and debate.
Can the Government Afford to Forgive?
What the report doesn’t take into account, however, are three important considerations: two that are relegated to the End Notes section and one that isn’t even mentioned.
Note 8 acknowledges the rancorous back-and-forth on the matter of federal student-loan profitability. Although a reasonable case can be made for taking into account certain market risks that are attendant to longer-term financings, there are offsets to that which should to be factored into the analysis.
Take, for instance, the fact that the government is, at this time, taking noteworthy advantage of the yield curve by borrowing short and lending long: selling one- to three-month Treasury Notes to fund the student loans it then prices based upon 10-year rates, plus upcharges.