The Student Debt Conundrum

The Future Of Freedom Foundation

by

March 18, 2019

Using data from the Federal Reserve, Student Loan Hero — an organization that provides “resources, tools and information” to help “student loan borrowers understand their student loans and make intelligent repayment decisions” — reports that

Among the Class of 2018, 69% of college students took out student loans, and they graduated with an average debt of $29,800, including both private and federal debt. Meanwhile, 14% of their parents took out an average of $35,600 in federal Parent PLUS loans.

Americans owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. That’s about $521 billion more than the total U.S. credit card debt.

11.5% of student loans are 90 days or more delinquent or are in default.

Average monthly student loan payment (among those not in deferment): $393.

What makes the statistics even more alarming is that only about 15 percent of student debt is private debt. Most of the money borrowed by students was borrowed from the deep pockets of Uncle Sam.

But it gets even worse.

According to the Final Audit Report of the U.S. Department of Education’s Office of Inspector General, “Federal Student Aid: Additional Actions Needed to Mitigate the Risk of Servicer Noncompliance with Requirements for Servicing Federally Held Student Loans,” Federal Student Aid (FSA), the agency within the Department of Education responsible for servicing all federal student loans, has not been doing a very good job:

FSA had not established policies and procedures that provided reasonable assurance that the risk of servicer noncompliance with requirements for servicing federally held student loans was mitigated.

FSA’s oversight activities regularly identified instances of servicers’ not servicing federally held student loans in accordance with Federal requirements.

FSA management rarely used available contract accountability provisions to hold servicers accountable for instances of noncompliance.

FSA did not provide servicers with an incentive to take actions to mitigate the risk of continued servicer noncompliance that could harm students.

FSA employees did not always follow policy when evaluating the quality of servicer representatives’ interactions with borrowers.

FSA management did not have reasonable assurance that servicers were complying with Federal loan servicing requirements when handling borrowers’ inquiries, borrowers might not have been protected from poor services, and taxpayers might not have been protected from improper payments.

Naturally, the FSA “strongly disagreed with the overall conclusion that it did not establish policies and procedures that provided reasonable assurance that the risk of servicer noncompliance with Federal requirements was mitigated.”

“It’s hard to look at this as anything other than completely damning,” says Seth Frotman, the former Consumer Financial Protection Bureau’s (CFPB) student-loan ombudsman who is now executive director of the Student Borrower Protection Center. “This is the most damaging in a long line of investigations, audits, and reports that show the Department of Education is asleep at the switch, when it is responsible for over a trillion dollars of student loan debt.”

Frotman resigned last August after issuing a scathing letter accusing Mick Mulvaney (acting director of the CFPB at the time) and the Trump administration of undermining the agency and its ability to protect student borrowers. “Unfortunately, under your leadership, the Bureau has abandoned the very consumers it is tasked by Congress with protecting,” it read. “Instead, you have used the Bureau to serve the wishes of the most powerful financial companies in America.”

Needless to say, the federal student loan program is a mess, and millions of recipients of its loans are mired in debt. So mired, in fact, that, according to two recent studies,

  • 40 percent of borrowers may default on their student loans by 2023
  • 250,000 borrowers default on their federal student loans each quarter
  • It takes 19.4 years, on average, to pay off student loans

And it should be noted that, unlike other forms of federal debt, which are dischargeable in bankruptcy, student-loan debt cannot generally be discharged in bankruptcy.

According to LendEDU — a website that helps consumers learn about and compare financial products, including student loans — the precursor of the federal student-loan program is the GI Bill. Established in 1944, the GI Bill allowed World War II veterans to attend college at a reduced cost or for free. Federal student loans were instituted in 1958 under the National Defense Education Act. High-school students “who showed promise in mathematics, science, engineering, and foreign language, or those who wanted to be teachers, were offered grants, scholarships, and loans.” Under the Higher Education Act of 1965, banks began “to provide government subsidized and guaranteed loans to students.” The Pell Grant was created in 1972. Yet, even getting free money for college did not deter students from also taking out student loans. Finally, under the Student Loan Reform Act of 1993, the federal government began directly lending “to borrowers, as opposed to through a private institution.”

From an economic perspective, federal student loans distort the market. Government’s backing or issuing student loans causes the price of higher education to artificially rise. Thanks to ever-increasing government largesse, there is no incentive for colleges and universities to ever lower their prices. Many schools have become completely dependent on federal student loans to keep their enrollment up. Consider the case of ITT Technical Institute (ITT Tech). It was once one of the largest for-profit educators in the United States. But after years of investigations and lawsuits, the U.S. Department of Education, in August 2016, prohibited students from using federal student loans at any of the school’s 130 locations. Just two weeks later, all ITT Tech campuses were closed and the company filed for bankruptcy.

From a fiscal perspective, federal student loans are not based on sound financial principles. Students with no credit or bad credit have just as much of a chance of getting a government loan as students with a good credit history. Students pursuing majors such as engineering or computer science that can lead to high-paying jobs are just as likely to receive government loans as students who major in women’s studies or gender studies.

From a philosophical perspective, federal student loans are an illegitimate purpose of government. The government is not a bank. It has no money of its own. All the money in the federal treasury has been taken from Americans in the form of taxes. No American should be forced to pay for the education of any other American. Even so, it is not the proper role of government to make loans or subsidize industries.

From a practical perspective, federal student loans don’t make any sense. Why should the federal government subsidize one industry? And if the federal government is going to lend Americans money for college, then why not for cars, boats, vacations, houses, and weddings? Why doesn’t the federal government just issue Americans credit cards to borrow money as they see fit?

What, then, should be done about the student-debt conundrum?

Many solutions to this conundrum have been proposed. Most recently, Sen. Lamar Alexander (R-Tenn.), a former U.S. Secretary of Education, has proposed that employers be required to deduct student-loan payments from employees’ paychecks and remit them to the government like payroll and income taxes that are withheld. But all of the proposed solutions suffer from two fatal flaws.

The first is that no proposed solution recognizes that the student-debt conundrum would never have arisen in the first place if the federal government had simply followed its own Constitution and had never had anything to do with education: no loans, no grants, no mandates, no subsidies, no funding, no school breakfast and lunch programs, no regulations, no standards, no vouchers, and no Department of Education.

The second is that no proposed solution calls for the federal student-loan spigot to be turned off. Like Senator Alexander’s proposal, they all call for reforming the federal student loan program instead of ending it.

The federal student loan program must be recognized for what it is and ended completely before any real solutions to the student debt conundrum can be offered.

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