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    Saturday, October 01, 2022

    Loan forgiveness unfair and unaffordable

    Joe Biden, supposedly a moderate, has become Bernie Sanders without much realizing it. Bernie Sanders and progressive Democrats have long advocated free college. Yet, most Americans understand that there is no such thing as free college any more than there is free lunch. Someone always has to pay.

    Biden has now proposed canceling much of the cost of college after the fact. What’s the difference between up-front free tuition and after-the-fact tuition cancellation, aka loan forgiveness? There is none, if you think about it.

    Taxpayers will have to pay. The scale of Biden’s proposal is budget-busting. He proposes forgiving up to $10,000 of student debt for up to 43 million “low- to middle-income” borrowers. That is single borrowers with incomes up to $125,000 and couples with up to up to $250,000 and forgiving as much as $20,000 for the lowest income borrowers who qualified for Pell Grants to pay for college.

    Biden’s definition of “low to middle” is interesting. He asserts that “No high-income individual or high-income household – in the top 5% of incomes – will benefit from this action.” So, 95% of Americans are low- to middle-income?

    Tellingly, the White House did not release a cost estimate of the Biden proposal. The Wall Street Journal cited a cost estimate for the proposal of $300 billion – an estimate prepared by Penn Wharton Budget Model before the Biden announcement. Yet, the Wharton analysis doesn’t include the extra $10,000 for 27 million Pell Grants recipients, nor does it factor in the myriad ongoing “loan relief” provisions in Biden’s proposal, such as reducing required monthly payments on non-forgiven loan balances from 10% to 5% of monthly income and forgiving the remaining balance after 10 years. The all-in cost of Biden’s proposal is closer to $500 billion, as The Journal Editorial Board later estimated.

    Before the announcement, pollsters claimed that many Americans supported student loan relief, but why would many Americans greenlight a program with which they would disagree if it were explained accurately as a free-after-the-fact equivalent of the free-up-front idea? Why? Because the cost of college attendance has tripled since 1981, as the White House Fact Sheet shows graphically on the very first page. Tripled in real inflation-adjusted dollars!

    That’s the real problem. If college costs were still reasonable, students could and would pay off their loans – willingly.

    Yet, even as the White House identifies the real problem, it is silent as to the causes of the real problem. Really? If the cost of any large government program had tripled in real dollars, even over four decades, wouldn’t you expect elected officials to investigate? More to the point, under what authority does a president spend hundreds of billions of dollars by executive order?

    So, why has college gotten so expensive? The federal government is to blame, specifically the federal student loan program itself has created the problem.

    For colleges, the federal student loan program provides free money. That the money is funneled through students is incidental. Colleges obtain unlimited funds at no interest cost with no repayment obligation. No wonder they have taken as much as they could get.

    Indeed, colleges determine the amount of the loans, since they determine the cost of attendance, which, in turn, the federal loan program almost automatically covers. Colleges are not on the hook if a graduate or drop-out encounters financial hardship and defaults.

    The obvious and inevitable result is that colleges have spent like drunken sailors, leaving unfortunate students and parents – and now taxpayers - to pick up the bill.

    The equally obvious and simple solution is to make colleges bear some of the cost of the federal student loan program. Six years ago, I proposed that colleges should take the first 5% of the loss on student loans and that they post 1% to 2% of the loan balance with Uncle Sam as collateral when the loan is extended.

    What would colleges do once they had skin in the game? For starters, they might trim their bloated administrations, where non-teaching staffs ballooned by 60 percent between 1993 and 2009.

    In 2016, there were $1.26 trillion outstanding. Today, that number has grown to $1.60 trillion.

    Borrowers have already enjoyed almost three years of a payment moratorium and of interest forgiveness. That’s enough. Biden’s grandiose plan is patently unfair to those who have repaid their loans or never attended college, and it is manifestly unaffordable.

    The problem should be solved at its root cause: free money for colleges should be discontinued. Free money for students doesn’t solve that problem, it compounds it.

    On a grander, more existential plane, the push for ever more “free” government benefits would seem to be a product of the American self-image of being “the wealthiest nation on earth.” With national debt now equal to U.S. GDP, it is not clear that America is so wealthy.

    Red Jahncke is president of The Townsend Group Intl, LLC, based in Connecticut. He is a regular contributor.

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