Wednesday, January 27, 2010

Rejoyce! Your Student Loan Will Be Forgiven!

In case you missed it, the Obama government plans to effectively take over the student loan industry. "The Student Aid and Fiscal Responsibility Act" (H.R. 3221) already passed the House (apparently no one was paying attention amid the health care bill debate), and right now it is in the Senate. The Senate Democrats are considering passing it during the budget reconciliation process.

So it comes as no surprise that the Loan Administrator in Chief may be announcing measures in tonight's State of the Union address that will forgive the student loan debt, with preferential treatment for the government employees of course. This is all to save the middle class, of course.
State of the Union: Cutting monthly student loan payment would be big help to graduates (1/27/2010 The Florida Times Union)

"Another major component of the president’s bid to re-energize a flagging middle class is to overhaul the student-loan process and make college more accessible to more people.

"He proposed instituting a cap on student loan payments for people carrying massive debt. Payments will be limited to 10 percent of income. Obama also said the program will forgive remaining debt after 10 years of payment for public-service workers and 20 years for everyone else." [Emphasis is mine. The article continues.]

What the heck. I am all for Obama to own everything. He should take over the credit card industry, and declare that all the credit card debt will be forgiven after 10 years of paying them at no more than 10% of one's monthly income. To expedite the "recovery", cut those years to 2 years, just in time for the next presidential election.

While we're at it, since the government practically owns half of U.S. residential mortgages, how about forgiveness on mortgage debt, after, say 10 years of payment?

Easy availability of student loans distort the market mechanism. Instead of valuing the time and money that you would have to spend getting the degree against the future potential value derived from having that degree (an economic decision), you can go to college, major in anything you want because you have the student loan and don't need to worry about paying back for some time. This inflates the cost of education. Schools have little incentives to lower the costs, and students have little incentives to do comparison shopping as they would if they were spending their own money.

Now the president is going to tell you you don't even need to pay back. The cost of education is now guaranteed to go up further, as cheap money (i.e. loans that don't need to be fully repaid) bid up the price of goods (in this case, education).

(HT: W.C. Varones Blog)


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