Imagine you are adrift in a small, overcrowded lifeboat that is quickly taking on water. Calmly, the captain stands. “Don’t panic,” he urges, “I have this under control.” He then proceeds to drill a few holes in the bottom of the boat, “to let the water out.”
Ridiculous as it sounds, that picture captures President Obama’s plan for dealing with the student loan crisis. With borrowers awash in a sea of debt, and the system taking on record defaults, the president and his allies blithely concoct different ways for those borrowers to walk away from their obligations. Meanwhile, college costs spiral ever upward, and taxpayers are left with the bills.
For decades, the federal student loan system has proven invaluable to millions seeking higher education. But during the past 10 years, student debt has tripled to $1.2 trillion as the federal government has all but wiped out private lending for college.
Today, 7 million borrowers — nearly 20 percent — have gone more than a year without paying a dime on their loans. The number of such severe delinquencies is up 6 percent over last year, despite an aggressive push by the Obama administration to put borrowers into programs that limit payments and often forgive debt. This is not a sustainable path.
These “debt relief” plans, which cap monthly payments at 10 to 15 percent of discretionary pay, have seen record enrollments swell by over 50 percent in just one year. That’s fine for the borrowers, but often not enough to put a dent in the loan balance. In some cases, borrowers can walk away from their remaining debts after just 10 years. Obama will be long gone by then, with taxpayers left holding the bag.
Like drilling holes in a leaky lifeboat, capping payments represents activity that does nothing about the underlying problem: exploding tuition costs and a rising mountain of debt.
A recent paper from the New York Federal Reserve suggests that the government is a big part of the problem. By analyzing changes in federal lending limits, Pell Grants, and tuition costs, the paper concluded that the expansion of and access to subsidized lending has accelerated tuition increases at colleges around the country. It estimates that for each new dollar in subsidized loans or Pell Grants, tuition rose by more than 50 cents. As a result, over the past decade tuition prices have increased far beyond the inflation rate, faster even than costs for medical care.
To date, that’s a problem that few in Washington have been willing to tackle. At universities, the price hikes are consumed by bloated faculties, extravagant capital spending, and administrative overhead that never stops growing. These costs have little to do with the core activity of teaching, and everything to do with branding, marketing, and reputation — attributes then used to justify even higher prices.
Colleges and universities set tuition at what the market will bear. Aggressive, subsidized lending enables the market to bear ever higher prices. This is a problem exacerbated by government policy, abetted by universities, and ignored by legislators.
Instead, proposals keep coming to reduce payments, defer payments, reduce debts, and forgive debts. But that debt is owed to us. Forgiving student debt simply converts personal debt into public debt. Instead of students repaying the government, the government borrows to pay off the students. This federal debt must ultimately be paid back later using taxes collected from those same students.
That, friends, is a shell game.
“Student debt relief” sounds enticing, but “tuition cost control” is more like it; and it won’t happen until government stops feeding the beast.
John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.