Economy, Regs, & Taxes

Student Loans for Votes

Obama announces plan to redistribute income to college grads.

Jun. 10, 2014

Barack Obama announced changes to the government’s “Pay As You Earn” college debt plan this week, broadening the eligibility requirements and reducing payments for student loan recipients. The current plan caps monthly student loan payments at 10% of discretionary income for borrowers who took out new loans after October 2007. Obama’s changes would extend the loan repayment cap to anyone repaying student loans. Any debt remaining after 20 years would be forgiven, and those working in the government or nonprofit sector would have their debt forgiven after 10 years. Taxpayers will be on the hook to pick up the balance.

In conjunction with Obama’s unilateral changes to the college loan structure, Sen. Elizabeth Warren (D-MA) introduced a bill in the Senate that would allow borrowers to refinance student loans at lower interest rates. The refinancing would be paid for by – wait for it – raising taxes on the wealthy. “The way I see it,” says Warren, “there are billions of dollars here that flow out of the U.S. Treasury to a tax loophole that are [sic] available to millionaires and billionaires.”

Obama echoed that sentiment, saying, “This should be a no-brainer. It would be scandalous if we allowed those kinds of tax loopholes for the very, very fortunate to survive while students are having trouble just getting started in their lives.”

For the record, money flows into the Treasury because people pay their money to the government in the form of taxes. In the Obama-Warren warped view, individuals don’t make money, the government possesses all the money, and the public is fortunate to be allowed to keep some of it.

The college debt crisis is real, but it cannot be fixed by income redistribution. In fact, the Obama economic model has exacerbated the problem. Under his orders, the federal government absorbed much of the student loan business in 2010 to remove private lenders from the equation. The result was a debt bubble that caused skyrocketing tuition costs. And as The Wall Street Journal notes, “Thanks to a series of federal loan expansions supported by first Sen. Obama and then President Obama, student debt outstanding has nearly doubled since 2007 to more than $1 trillion.”

“Pay As You Earn” amounted to little more than market manipulation. Colleges and universities were inspired to keep raising tuition costs because it was clear the government would see they were paid back even if student borrowers defaulted. And student borrowers had no reason to choose wisely in shopping for colleges because no matter how deep into debt they got, sooner or later Uncle Sam would bail them out.

We need only look at the unraveling of the health care system and the energy industry to see the folly of Obama’s meddling in the college tuition market. As usual, leftists try to hide the fact that their own actions are the cause of greater problems, as their only response is to double down and put more government muscle into it.

Obama and Warren know the impact their proposals will have on the economy, and surely they know how much this greatly expanded program will really cost taxpayers. Yet they push it anyway to achieve their election year political goal: the fealty of young people to the Democrat Party.

Yet how can we expect young people to navigate a Byzantine borrowing mechanism that forces them to make one of the largest spending decisions of their lives when they have virtually no financial experience? Is it really necessary for every single person to spend four-years at a liberal arts college pursuing a degree in a vocation that they are likely to change before they reach the age of 30? And, in a steadily shrinking and shifting economy, how are these students expected to find jobs even remotely related to their field of study when they graduate?

Obama and Warren give no indication as to why 10% of discretionary income is the magical threshold payment cap for borrowers, or whether a borrower has to even display economic hardship in order to take part in the plan. And it should already be clear that income-based repayment won’t stem the rising tide of college debt – it will make it worse. If the government wants to solve that problem, it should get out of the way altogether.

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