Stop Calling Them ‘Student Loans’

By Dominic Pino

Monday, November 25, 2024

 

Aloan is a financial product where someone lends money to someone else at interest. When the borrower pays back the loan, the lender makes money for providing the valuable service of financing.

 

In passing the Affordable Care Act in 2010, the federal government nationalized student loans to help offset the costs of the law. That means that Barack Obama was also familiar with the definition of “loan,” and he said nationalizing student loans would make them more efficient and, therefore, more profitable for the government. “By cutting out the middleman, we’ll save American taxpayers $68 billion in the coming years,” Obama said at the time.

 

Today, the government expects to lose money on the average student loan. In total, the government’s entire student-loan portfolio lost $205 billion between 2015 and 2024, and it’s expected to continue losing money for the foreseeable future.

 

These are not loans. They are handouts. Policy-makers need to treat them accordingly.

                                                                                

A blog post from the Committee for a Responsible Federal Budget, based on new research from the Congressional Budget Office, finds that 2014’s projected $135 billion gain from student lending was off by $340 billion. That wasn’t because the CBO was wrong, but rather because the student-loan programs changed in the intervening years.

 

“2014 was one of the first years that new borrowers were eligible for a new, more generous form of Income-Driven Repayment (IDR), and since then estimated costs have exploded,” the CRFB post says. The pandemic pause in student-loan repayments also contributed to the explosion in costs.

 

That pause is over now and won’t affect any future “loans.” But most of those “loans” are nonetheless expected to lose money because of the more widespread adoption of IDR.

 

In 2014, the federal government was projected to at least break even on all five types of student loans: subsidized undergraduate loans, unsubsidized undergraduate loans, Graduate Stafford loans, GradPLUS loans, and Parent PLUS loans. This year, it is only projected to make money on Parent PLUS loans. All the rest are significant money losers.

 

The biggest discrepancy is in GradPLUS loans, which are for graduate students and are unlimited. For every dollar of GradPLUS loans issued, the government was expected to make 41 cents in 2014. Today, it is expected to lose 25 cents per dollar.

 

Graduate Stafford loans, which are capped, went from a 29-cent gain to a 21-cent loss. Unsubsidized undergraduate loans, which are available to all students regardless of income, went from a 9-cent gain to a 27-cent loss. Subsidized undergraduate loans, which are only available to people with lower incomes, used to roughly break even, but now they cost 35 cents per dollar issued.

 

Loans on fixed-term repayment plans are still expected to net the government money. The problem is that most loans are on IDR plans instead. “CBO estimates that over 70 percent of undergraduate loans and nearly 80 percent of graduate loans will be in IDR plans,” the CRFB post says.

 

Those graduate loans generally go to middle- and upper-class students who will go on to make plenty of money. “Graduate loans in IDR are projected to cost the federal government about $120 billion over the next decade,” the post says. In just a few years, student lending went from a money-raiser for the federal government to a welfare program for middle-class college students.

 

That follows Director’s law, named for University of Chicago professor Aaron Director and elucidated by George Stigler in a 1970 paper. Director’s law is, as Stigler put it: “Public expenditures are made for the primary benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and the rich.”

 

The reason for this imbalance is that the middle classes are better at politically organizing than the lower classes. There aren’t enough rich people to matter electorally, but there are plenty of middle-class people who can swing an election. They have more time on their hands than lower-class people to create interest groups and start pressure campaigns to get their way, and politicians have to pay attention to them to be successful.

 

Public universities in general are a fulfilment of Director’s law. Insofar as they are funded by taxation of a state’s residents, all taxpayers bear the burden of financing a product enjoyed largely by middle- and upper-class students. The nationalization of student lending further adds to this imbalance by taking the portion of the money that is supposedly coming from students and subsidizing it with more taxpayer dollars from the federal government.

 

Hayek warned in the Constitution of Liberty, “Though socialism has been generally abandoned as a goal to be deliberately striven for, it is by no means certain that we shall not still establish it, albeit unintentionally.” The stated intention behind nationalizing student loans was to raise money for Obamacare. That was one of many falsehoods undergirding that law. Instead of raising money, the program no longer resembles lending at all, and the losses from giving handouts to college students have been socialized.

 

Stop calling them “loans” and start analyzing them as a welfare program. The relevant question for the program going forward is: Are middle-class graduate students really the best recipients of billions of dollars in government welfare?