Progressives, led by Senator Elizabeth Warren have already indicated their desire to turn the federal direct student loan program into a larger entitlement with greater underfunding and endless red ink. The 2016 campaign version of this strategy comes virtue of Ohio candidate for the U.S. Senate, Democrat P.G. Sittenfeld.
Specifically, he proposes:
- Reduce interest rates to 2 percent for all recipients of subsidized federal loans who graduated with a four-year college degree since 2009.
- Reduce interest rates to 3 percent for other federal loan recipients who graduated with a four-year college degree from public institutions since 2009.
- Provide one year, up to $12,500, of federal student loan forgiveness to Pell Grant recipients upon their completion of a four-year degree.
The proposal asserts to cover the budget cost by imposing the so-called Buffet Rule – a 30 percent minimum tax on higher-income individuals.
The proposal flunks basic tests of policy design, budget balance, and fairness.
The proposal does nothing to slow the growth of college costs. In the end, student loans are a means to finance the underlying cost of college, and it is that underlying cost that is the real problem. The proposal would do nothing to improve the efficiency of delivering college education; nothing to better match students to the right educational institution; nothing to reduce the time to completion for college degrees; and nothing to enhance the preparedness of students for college. Unless and until those problems are addressed, the student loan problem will not be fixed.
The proposal sharply increases federal deficits. The proposed Buffet tax would raise roughly $50 billion over the next 10 years. Unfortunately, the interest rate giveaway would total $74 billion and the Pell grantee forgiveness would add another $51.7 billion, for a total cost of nearly $126 billion. It is a bad sign when a policy proposal runs out of other people’s money.
The interest rate reductions would not induce a single additional young American to attend college. By design, these interest rate cuts are targeted at those who have already graduated. Spending $74 billion of taxpayer money would not increase educational attainment in the U.S.; would not raise labor productivity in the U.S.; and would not enhance the earnings of a single middle-class American. The same is true of backward-looking Pell grantee forgiveness, although there may be a small impact on incentives to finish in the future.
The progressives’ borrow-and-spend approach is not a viable solution to student debt problems
The proposal’s loan forgiveness for Pell recipients doesn’t reduce borrowing. The average tuition at a public four year university is $9,139 with Pell recipients receiving an average of $5,730. Rather than plowing an additional $51.7 billion into a loan forgiveness program, reforms to the Pell grant programs should be considered to ensure that the most in-need students receive federal grant aid. These reforms along with minimal additional investments could sharply reduce the gap between tuition costs and grant aid eliminating the need to borrow.
The interest rate cuts are targeted on those most able to pay. The most recent evidence is that graduating college raises pay by $23,600 annually compared to those that do not complete. Yet, the former get a cut in their interest costs, while the latter do not. Why? At the same time, the interest savings is at most in the neighborhood of $1,300, or 58 percent of the difference. Those who graduate can, and should, pay off their existing loans without dipping into the taxpayer’s pocket.
There is a real student loan problem in the United States. A real solution would address the cost of college, target Pell grants more effectively, and incentivize completion of college for grantees and borrowers alike. The progressives’ borrow-and-spend approach is not a solution.
Douglas Holtz-Eakin is President of the American Action Forum. Chad Miller is Director of Education Policy at the American Action Forum. You can follow them on Twitter @djheakin and @ChadAMiller8.