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December 10 2012

$1 Billion Nationalized Student Loan Industry Now Officially Big Enough to Bail Out

Vicki E. Alger

Congress is proposing the Student Loan Forgiveness Act of 2012 in response to a record-high default rate. But American Majority Action’s Ron Meyer and Celia Bigelow are right when they note:

America’s now-nationalized student loan industry just reached a value of $1 trillion, according to Citigroup, growing at a 20 percent-per-year pace. Since President Obama nationalized the industry (a tacked-on provision of the Obamacare bill), tuition has gone up 25 percent and the three-year default rate is at a record 13.4 percent.

With many young people unable to pay their loans (average graduating debt is about $29,000), Citigroup and others are speculating that this industry might be ripe for a bailout.

To pay off all the current defaults, Citigroup says it would cost taxpayers $74 billion. However, this number doesn’t include those who will default in the coming years, and, when the government rewards the defaulters, it will encourage more borrowers not to pay their debts.

Sticking taxpayers with a $1 trillion bailout tab does nothing to make college more affordable, and it kicks the can down the road…again.

In spite of what the bill title tries to imply by including the term “forgiveness,” it’s not a get-out-of-jail-free card. Students will still have to make a minimum of 120 loan payments, 12 monthly payments per year for 10 years, before they qualify for “forgiveness.” After that time Fastweb and FinAid Publisher Mark Kantrowitz explains:

The proposed 10-year loan forgiveness will be available to all borrowers, not just new borrowers. Existing borrowers will have the full loan balance forgiven. However, the forgiveness of principal and fees for new borrowers will be capped at $45,520 to prevent “moral hazard”, where students borrow excessively knowing that the excess debt will be forgiven. (All accrued but unpaid interest will be forgiven.) The forgiveness will also be partially retroactive, with the clock on the 120 payments starting 10 years prior to the date the legislation is enacted. The amount forgiven will be tax-free.

It’s also worth considering what sort of precedent this plan creates. Once more, future generations who had no hand in creating the problem will be forced to pick up a much-inflated tab.

Talk about paying-it-forward.

A better solution is transparency about real college pricing, more flexibility for students to take the courses they need in ways that let them work, outcomes-based public financing for colleges, and getting government out of what should be a private-sector enterprise.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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