Help students think twice before they go into debt

Neetu Arnold

Editor’s note: This article was originally published by The Hill on February 25, 2020 and is reposted with permission.

The Trump administration has proposed several reforms of federal student loan programs as part of the 2021 budget plan. Suggested changes include capping loan limits for graduate students and parents of undergraduates, removing student loan forgiveness for those planning to work in public service fields, and eliminating subsidized student loans. The budget probably won’t pass through this Congress, but the suggested reforms should help persuade public opinion to welcome education loan reforms that require Americans to think twice about how they pay for college.

That’s a good thing.

Students can take out federal college loans easily, no matter how unlikely they are to repay the money. Students who drop out of college struggle to find jobs that pay enough for rent and the bank. Underemployed college graduates work in low-paid jobs that don’t require a bachelor’s degree. Students and parents end up burdened with debts they can’t manage.

Debt-crippled borrowers delay key life events such as marriage and buying a home. Taxpayers also suffer because they shoulder the costs of unpaid federal student loans. Americans’ massive $1.56 trillion student debt hurts the economy by inhibiting consumption spendingand business creation. Our nation’s monstrous student debt endangers individual borrowers, taxpayers and the American economy.

But the solution is not as simple as telling people to “stop borrowing money you can’t pay back.”

While researching my upcoming report on student debt for the National Association of Scholars, I’ve interviewed current college students, recent graduates and high school grads who went straight for a job. My interviewees usually see higher education as a gateway to a better life, and are willing to take out thousands of dollars in loans to get a college degree. Unfortunately, they’re also far too confident their degrees will get them good jobs that will allow them to repay their loans quickly. Partly they don’t know about the 2020 job market, and partly older family members give them advice as if we were still living in 1985. Students overestimate the financial benefits of a college degree — by a lot.

Overestimating benefits will skew any cost-benefit analysis, especially when you underestimate the cost of college. “You will spend 30 years paying back your loans” just isn’t real to an 18-year-old, even when family members warn them that college costs an arm and a leg.

The reality only hits when students have to start repaying their loans — plus interest.

Students and families will go deep into debt to pay for college, so long as borrowing money is easy and the due date is years away. The government has to take a stand to discourage Americans from taking on uncontrollable debt.

The administration’s proposals would do exactly that. They would force borrowers to plan prudently and reduce their ability to delay repayment far into the disregarded future.

The administration proposes setting limits to Direct Plus Loans, to ensure that parents and graduate students aren’t borrowing more than they can repay. Some lower-income Americans who take out Grad and Parent Plus loans have taken on debt that exceeds $50,000 per household in recent years. Too many fall behind on payments as their debt balloons. Their unmanageable debts then get passed on to the taxpayers.

The administration’s planned elimination of subsidized loans, which delay interest repayments until students have left school, also would discourage undergraduate students from taking out imprudent loans. Those who benefit from these loans tend to be from lower and middle-income backgrounds — and so are those who suffer from them when they drop out of college, which includes 30 percent of students after two years. Eliminating these loans will require students to think twice, which will ungrease the skids to debt slavery.

The administration’s proposed cancelation of the Public Service Loans Forgiveness Program (PSLFP) would remove another major incentive for student debt. PSLFP forgives Direct Plus Loans debt for those who work in qualified public service jobs. Thousands of students go unnecessarily into debt, expecting to qualify for the PSLFP, but the program only approves 1 percent of applicants. The administration’s plan would end a program that gives students terrible financial incentives.

The Trump administration’s ideas pave the way for future policies that protect students from financially bleak futures. Many Americans see federal student loan programs as vehicles for opportunity, and feel that policy changes that restrict loan access are cold and heartless. But what kind of opportunity is the opportunity to acquire crippling debt?

Student loan program hucksters are pushers of ruin. We should protect our children’s futures by running them out of town. 

Neetu Arnold (@neetu_arnold) is a research associate at the National Association of Scholars.

Image: Public Domain

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