Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. – The Economic Times
Christmas came early this year for student-loan debtors. First, the Biden administration is extending the pause on student-loan payments until the end of 2022, which means that college borrowers are getting a two-and-half-year holiday from making monthly loan payments.
That’s not all. President Biden will give every borrower under an income cap of $125,000 (or $250,000 for married couples) $10,000 in student-debt relief.
Borrowers who received Pell Grants in college will get $20,000 in debt relief.
That’s big news–especially for borrowers who got Pell Grants while in school. If we add the Pell Grant money these student-borrowers obtained while in college, plus the $20,000 loan write-off, many of these people will have gotten a free education.
And there’s more. The Biden administration will launch a more generous income-based repayment (IBR) plan that will lower income-based payments for undergraduate loans from 10 percent of discretionary income to just five percent. The Department of Education also intends to raise the amount of income considered nondiscretionary, meaning that undergraduate borrowers will pay less than five percent of their income on their student loans.
Still, Santa’s sack of gifts is not empty. Under DOE’s proposed rule, the government will cover the unpaid monthly interest for people in IBRs, meaning student debtors on income-based repayment plans won’t see their loan balances go up due to negative amortization.
Party poopers like Larry Summers say that all this federal generosity will fuel more inflation, but who cares? Certainly not the student-loan debtors. In fact, rising inflation will be a bonanza for them because they will be paying back student loans with deflated dollars.
Grumps also argue that the Biden student-loan forgiveness scheme acts as a moral hazard, and I think this is true. If students know they will make loan payments based on their income, not the amount they borrowed, they have every incentive to borrow extravagantly.
And Biden’s munificent changes in income-based repayment plans will likely act as a moral hazard for the colleges as well. University leaders have no incentive to keep their costs in line when they know that students will cheerfully absorb tuition hikes because their loan-repayment plans are so generous that it won’t matter whether their tuition bills get larger.
In defense of Biden’s sweeping student-loan reforms, I think everyone agrees that many students took out loans to get a college education that wasn’t worth much and was too expensive.
Millions of students were scammed by for-profit colleges or private nonprofit universities that cranked out overpriced, worthless graduate degrees. Surely the victims of the higher education racket deserve some relief.
Nevertheless, the federal government is headed for catastrophe if it rolls out student-loan repayment plans that are overly generous while doing nothing to rein in the higher-education racket.
Unfortunately, the feds are doing nothing to stop students from being scammed. Instead, federal money is propping up the colleges–both profit and nonprofit, which allows them to raise tuition prices yearly.
At the same time, the hucksters who run the colleges offer students educational experiences that don’t help them get jobs after they graduate. As a consolation, I suppose, the government is making it very easy for ripped-off students to manage their college debt.
The cold war Russian economy, it was said, ran on the principle that the government pretended to pay the workers and the workers pretended to work.
Something like that is going on in American higher education. The colleges are pretending to educate their students, and the students are pretending to pay for it.
This will end badly for everyone–students, colleges, and taxpayers.
- DOE wants to modernize the student loan program but mucks up the planning process - January 20, 2023
- Department of Education Cares So Much About Forgiving Your Student Loan Debt That They Will Start to Garnish Grandma Again - January 10, 2023
- Taxpayers Lose-Lose with Federal Student Loan Future. All Options Really Suck. - January 9, 2023
1 thought on “Biden Administration Student Loan Solution Not Likely to Save the Patient”
As always, an excellent analysis from Richard Fossey.