by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Janet Lorin needs just two opening sentences in a Blooomberg Businessweek article to describe a key problem with modern American higher education.
Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013. This year, she says she hopes to earn $35,000 working part-time jobs as a therapist and yoga teacher—not enough to manage a loan payment of about $2,000 a month.
But the story doesn’t end with Ms. Strong’s misjudgment of her marketability as a psychologist. The rest of Lorin’s article fits with the general theme that college has been oversold.
But Strong isn’t paying anything close to that. She’s one of at least 3.8 million Americans who’ve qualified for federal programs that tie payments to income and eventually forgive debt for some struggling borrowers, leaving taxpayers to pick up the tab.
President Obama has praised the programs for offering a lifeline to borrowers who’d otherwise default, scarring their credit. Strong pays about $100 a month on her federal loans, which she used to finance her graduate studies at Argosy University, a for-profit institution. “I wouldn’t know how I would pay it back otherwise,” she says.
Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of outstanding balances in the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.
Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt. …
… The Congressional Budget Office estimates that, for loans originated in 2015 or after, the programs will cost the government an additional $39 billion over the next decade. That’s more than the agency spends each year on Pell grants, the public scholarship program for low-income students. “In a time of scarce resources, is it better to spend money in that way or raise the Pell grant?” asks Margaret Spellings, who served as education secretary under George W. Bush.