Uncle Sam's New Inducement to Borrow

by Frederick M. Hess  •  Jul 2, 2009 at 2:02 pm
Cross-posted from The Enterprise Blog

http://www.frederickhess.org/2009/07/uncle-sams-inducement-to-borrow

The Washington Post's Joe Davidson reports that Robert Miller, 30, is "just plain giddy." What has got Miller, a former Peace Corps volunteer, so pumped? Yesterday marked the launch of the Public Service Loan Forgiveness Program, under which ten years of public service will prompt Uncle Sam to erase all student loan debts, and the Income-Based Repayment plan. Miller, who racked up $100,000 in student debt during graduate school, expects his monthly payment to drop from $850 to $220—and to giddily note (here we go) that "the vast majority of my debt I'm not going to pay."

Miller is right. Under the student loan legislation that Congress passed last year, those who put in ten years working for federal, state, or local governments, or other approved nonprofits and public service employers, will have their federal student loans forgiven. Somebody will have to pay, of course, but this allows Miller to stick taxpayers with the bill. Of course, given that the Obama administration has no intention of paying for any of this through current or projected revenue, the reality is that Miller and his peers will get to pile the cost of his pricey graduate degree onto the mountain of debt that we'll be dumping onto our children and grandchildren. Whoo-whee!

Even those of us who believe that the federal loan system designed in the late 1960s and early 1970s requires substantial overhaul, and who think experimenting with income-based repayment is generally a good idea, should look askance at what Congress has wrought. Congress has crafted a policy that will reward students who racked up large debt loads and then go into public service. The Income-Based Repayment provision means that monthly federal loan payments are capped based on income and family size—so students planning to work for a nonprofit can rack up massive amounts of undergraduate or graduate debt without worrying that they'll be expected to pay it back. Those students who attended on scholarship, opted to attend low-cost institutions, or paid their own way stand to gain little or nothing from these reforms, while students who gorge on debt in order to attend overpriced private institutions will be rewarded.

This is peculiar at a time when policy makers voice concern about rising college costs. Denying a major perk to college grads who emerge debt-free while asking future taxpayers to heavily subsidize overextended borrowers hardly seems calculated to encourage thrift or cost-conscious behavior. At least it sounds like things will pick up for Miller, who laments, "There's something disheartening about being 30 . . . and still living like you're an undergrad."

Let's hope the next generation thinks the upgrade to his quality of life was worth the cost.

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