Elizabeth Warren Leaves Taxpayers on Hook for More Student Loan Subsidies

COMMENTARY Education

Elizabeth Warren Leaves Taxpayers on Hook for More Student Loan Subsidies

Jun 9, 2014 2 min read
COMMENTARY BY
Lindsey M. Burke, PhD

Director, Center for Education Policy

Lindsey Burke researches and writes on federal and state education issues.

Congress has long tried to help students afford a college education. It has cut interest rates on federal student loans, vastly expanded federal lending and lifted caps on borrowing. In the 1980s, it even let parents borrow directly from the feds — through the Parent PLUS program — to pay for their children’s college.

None of this has reduced college costs. Indeed, some argue this open spigot of federal funds has enabled universities to increase tuition and fees.

Enter Sen. Elizabeth Warren. The Massachusetts Democrat is proposing that the U.S. Department of Education’s Direct Loan Program be expanded to refinance both public and private student loans. The feds would pay off private lenders and issue low-interest government loans to take their place.

It sounds appealing. Yet the policy is problematic for private lenders, students and taxpayers — the ones who foot the bill for all this federal largesse.

Private lenders must already compete with artificially low (i.e., taxpayer-subsidized) interest rates on federal loans. And as Jordan Weissmann noted in Slate: “Since pre-payments equal a loss to the [private] lender, Washington would essentially be seizing their profits.”

The Congressional Budget Office also predicts that the Warren bill would “lead more individuals to opt for the longer repayment terms and the possibility of eventual loan forgiveness that are features of the income-based repayment plans offered under current law.”

The Obama administration issued regulations last November capping what students can be required to pay at just 10 percent of discretionary income, and offering loan forgiveness after just 20 years (just 10 years for those in public service jobs).

And on Monday, President Obama issued an executive order extending the “Pay As You Earn” option to 5 million previously ineligible borrowers who took out student loans prior to 2007.

And then there are the taxpayers, who stand to take it on the chin in several ways. First, Ms. Warren would finance her loan expansion through the ever-popular “millionaire’s tax” — in this case, a levy on individuals earning between $1 million and $2 million. Eventually, those thresholds would be indexed to inflation.

How much will the loan refinancing cost taxpayers? We don’t really know. The Congressional Budget Office estimated that refinancing — along with the millionaire’s tax — would actually increase federal revenues by $72.5 billion over the first 10 years. But — and this is a huge “but” — that estimate does not take into account actual market risk.

As the budget office has explained in previous analyses, “The government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower.” A fair-value estimate of Ms. Warren’s proposal would account for that risk, producing a more accurate reflection of the true cost of her proposal. But the budget office has yet to issue a fair-value analysis of the refinancing proposal.

Ultimately, simply refinancing student loans and increasing federal subsidies can do nothing to solve the college cost problem. And it certainly won’t encourage colleges to keep costs in check.

Federal higher education subsidies shift the responsibility of paying for college from the student, who directly benefits from attending college, to the taxpayer. Moreover, transferring the burden of student loan financing from university graduates to taxpayers — three-quarters of whom do not hold bachelor’s degrees — is inequitable. After all, college grads on average will earn significantly more over the course of a lifetime than those without a college degree.

If Congress is interested in reining in college costs, increasing federal loans and grants will never achieve that goal. Thankfully, there are innovative proposals on the table that would.

Sen. Mike Lee, Utah Republican, has introduced a proposal that would fundamentally restructure accreditation — a reform that holds the prospect of dramatically reducing college costs, while increasing access to higher education for aspiring students.

By contrast, Ms. Warren’s refinancing proposal does nothing for current and future students. It only serves to further burden taxpayers, and to give universities license to hike tuition and fees even higher.

- Lindsey M. Burke is the Will Skillman Fellow in Education Policy at The Heritage Foundation.

Originally appeared in The Washington Times