August 21, 2015
Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing “income-share agreements” where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender’s problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
“It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program.”
Sorry folks, but anyone who thinks the federal government is “bankrupt” should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to “bankrupt” borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel’s calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
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