Student Loan Defaults: A Cynic's Opportunity
For most graduating from high school, the best prospects for long-term self-sufficiency lie on the other side of college graduation. The odds are even better if the field of study lies in science, technology, engineering, and math (STEM), and better yet if the student earns a post-graduate shingle. But financing a college graduation is difficult for most. Using the minimum amount of borrowed funds is wise, because repaying student debt can limit graduates' financial freedom for decades.
Aggregate student loans in the U.S. have risen to $1.2 trillion. In 2012, among those who borrowed, the average debt was $27,183. Graduate students took on even more, and represent 40 percent of federal loan disbursements. Among those who earn a master's degree, 47 percent borrow more than $40,000 and 20 percent borrow more than $80,000. Among undergraduates, 68 percent borrow $10,000 or less, 7 percent borrow more than $30,000, and 2 percent more than $50,000.
The student-loan burden becomes heavier when the graduate is unemployed, underemployed, or disillusioned; 10.8 million suffer that plight. The student-loan default rate could be higher if not for government programs such as "Pay-As-You-Earn" (PAYE), which was introduced in 2012. PAYE sets the monthly loan payment in accordance with discretionary income (income less the poverty-level income for the family). A borrower makes payments in the PAYE program for two decades, or one decade if employed by the government. At the end of those periods, any unpaid balance is forgiven.
One prominent case of student-loan default is that of Lee Siegel, who holds two master's degrees from Columbia University. He intentionally defaulted on his student debt. In a New York Times opinion piece, he defended his self-indulgent choice and goaded millions of others to follow his lead. No one is forced into double master's degrees to chase employment offering notoriously low wages — that's a personal failing. It's not something the rest of us should have to subsidize.
The other ugly case in student debt is Corinthian College. Corinthian allegedly committed fraud with its job-placement statistics, deceiving students into thinking their chances of employment were better than they were. The Department of Education has decided to forgive most or all of the $3.5 billion in Corinthian student debt. There is some justice in that forgiveness, since the Department of Education had been monitoring the questionable statistics for some time and did not act to protect the students from taking out pointless loans.
But those cases are minuscule. There is still $1.2 trillion in loan balances owed by graduates enjoying the higher lifetime incomes that flow from college degrees. Despite the financial and cultural advantages they enjoy, some seek to avoid making good on their commitments to repay. The default rate had been 15 percent, but it dropped to 13.7 percent, or about one in seven.
This sets up a gleaming opportunity for vote-obsessed cynics. Loan forgiveness could be a campaign theme that lasts for several years, collecting voters willing to swallow the social-justice Kool Aid and pocket the new entitlement. Those susceptible to believing in "free higher education" will be uninterested in the moral hazard of government forgiving loans and how it damages taxpayers. Instead they will revel in campaigns that feature income-redistribution themes, and extend the class-warfare rhetoric that has suffused recent elections.
While some dismiss such rhetoric as "just politics," many true believers will expect action after the election.
Alan Daley writes for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.