Student Loan Update: Free Government Money In Action

The federal student loan program has been back in the news lately. On April 6 the Biden Administration announced the extension of the “pause” on payments of principal or interest federal student loans through August 31. Does anybody believe that when August 31 comes the “pause” will not be then extended yet again at least through Election Day in November? Supposedly this is a matter of Covid “emergency.” Is this particular branch of the Covid “emergency” ever likely to end?

Over in the progressive wing of the Democratic Party (and is there really any other wing today?), even the indefinite “pause” on repayments just doesn’t seem to satisfy. There, the catchword is “cancellation.” In the run-up to the Biden April 6 announcement, Vermont Senator Bernie Sanders stated his position in a tweet: “Cancel student debt. All of it.” Massachusetts Senator Elizabeth Warren weighed in in a widely-cited New York Times op ed on April 18:

Americans support providing some student loan debt cancellation — an action the president could take entirely on his own. Doing so would lift the economic outlook for too many borrowers who still weren’t able to get a college diploma, for the millions of female borrowers who shoulder about two-thirds of all student loan debt, and for Blackand Hispanic borrowers, a higher percentage of whom take on debt to attend college compared to white students, and have a harder time paying it off after school. With the stroke of a pen, the president could make massive strides to close gender and racial wealth gaps.

Senator Warren does not enlighten us as to where the President gets the authority to cancel student debt “entirely on his own.” I suspect that the Supreme Court would disagree.

Federally-guaranteed student loans seemed like such a good idea when the program got started. Many of the best and brightest would benefit from college, but could not afford the cost. With federal support via guaranteed student loans, the young people could maximize their potential, and society would benefit at the same time from their increased productivity. The cost to the taxpayers would be minimal because the borrowers would have to repay. What’s not to like?

And then it all turned into a gigantic honeypot to be used for vote buying.

Let’s have a brief review of prior Manhattan Contrarian coverage of the student loan situation. In the very first month of this blog’s existence, November 2012, there was a post titled “Out Of Control Student Loans.” At the time, the total amount of outstanding federal student loans had just passed $1 trillion. The post asked “Any chance of getting the trillion back?” At that time, the official default rate had just shot up from about 6% to 11%.

I returned to the subject in an April 2015 post titled “Federal Student Loan Update: How Huge A Disaster?” The outstanding amount of the loans had crept up to about $1.1 trillion, and the default rate was skyrocketing. Excerpt:

We are now seeing how fast this kind of pushing of "free" federal money can blow up and explode. . . . You almost can't believe how fast this is going south. According to . . . Education Department data as of June 30, 2014, the delinquency/default rate had reached 18%. Oh, but with another 34% in deferment, forbearance or bankruptcy, meaning that of those supposed to be repaying, almost 27% were in default.

The next post was in October 2018, titled “Something The President And Congress Should Pay Attention To: Student Loans.” Now the amount of loans outstanding had reached $1.5 trillion. The program had begun in 1966. I remarked: “46 years to go from zero to the first trillion, and just five and a half years to add the next half trillion.” The post cited a study by The Brookings Institution projecting that by 2023 the default rate could reach 40%.

Well, here we are in 2022. The amount of the outstanding student loan debt is now given as about $1.7 trillion. Nobody knows the default rate anymore, since the obligation to repay has been suspended since a Trump administration emergency Covid order in March 2020.

I’m betting that the payment moratorium will remain in effect at least as long as Biden is in office. A long enough moratorium gets pretty close to cancellation. The money goes to a core Democratic constituency, recent college and graduate school graduates, to buy their loyalty. A Brookings study from October 2020, based on data from the Federal Reserve, gives information on who benefits by income quintile:

Other data in the Brookings study indicate that as of 2019, 56% of student loan balances were owed by people with graduate or professional degrees, and another 29% by people with bachelors degrees.

The first line of that Elizabeth Warren New York Times op ed was “Democrats are the party of working people.” Not really. The proposed student loan bailout is a handout to the relatively wealthy, with the “working people” almost entirely on the paying end of the equation. But then, in progressive world, it’s all free money, so why does it matter?