Obama Drives Up College Tuition Through Perverse 'Pay As You Earn' Program

July 7, 2014 - 1:28 PM

Wastefully-run colleges can now increase tuition even faster, at taxpayer expense, as a result of the Obama administration's recent expansions of the Pay As You Earn program.  For example, a recent executive order will allow an additional five million borrowers to enter the program, although many of those borrowers would not benefit from entering it, and thus aren't expected to do so.

The Pay As You Earn program limits borrowers' monthly debt payments to 10 percent of their discretionary income. The balance of their loans is then forgiven after 20 years - or just 10 years, if the borrower works for the government or a nonprofit.

It will cost taxpayers a lot, while doing nothing for most student borrowers (who may experience tuition increases as a result), and it will favor imprudent borrowers over prudent borrowers.

Most students chose inexpensive colleges or borrowed modestly, meaning "the average graduate's debt level of $27,000" is no more than "the price of a car." They will not choose to participate in this program, since they would pay more, rather than less, by paying ten percent of their income for years, which could add up to much more than $27,000 over a 20-year period.

But, imprudent borrowers who borrowed much more than that, for majors that do not lead to a high-paying job, will likely participate, since they will now be able to limit their payments to a fixed percentage of their discretionary income, and then have the unpaid balance remaining after 20 years (or just 10 years, if they go to work in the federal bureaucracy) written off at taxpayer expense, no matter how huge the unpaid balance is. The result is that they will pay the same amount over 20 years (or 10 years) no matter how much their high-priced college charged in tuition - eliminating any incentive for such colleges to keep costs under control, or to keep their tuition from escalating at a dramatic rate (some low-quality liberal-arts colleges charge very high tuitions.)

Georgetown Law School has figured out how to game the Pay As You Earn Program to make taxpayers absorb the entire cost of educating of its left-leaning "public interest law" students, so that these students do not actually pay a dime, and taxpayers will pick up their entire six-figure tab. Taxpayers do not just pay the balance of these students' loans remaining after ten years of payments. Instead, taxpayers effectively pick up 100% of the cost. I explain how that taxpayer rip-off works at this link. After a stint working for the government or a non-profit, these students can then move on to lucrative law firm jobs, having forced taxpayers to effectively pay for their entire law school education.

Although the Obama administration claims its recent expansion of the Pay As You Earn Program will not cost much, it will in fact cost billions of dollars that Congress never authorized or appropriated, an issue raised by concerned senators like Lamar Alexander (R-Tenn):

"Sen. Alexander also questioned President Obama's legal authority to carry out the plan without congressional approval. The White House had previously asked Congress to approve the plan through its budget, but Congress never did. Now, the president is acting alone through executive action."

Mr. Alexander said the 2010 law that authorized the "Pay As You Earn" program doesn't appear to give the president the authority to expand it without congressional approval. He said expanding it would drive up costs.

"I still haven't found the authority for the president to do this," Mr. Alexander said in an interview. "There's very likely to be a cost in this and we need to know what it is, and we need to change the law to conform with that cost."

As Marc Martinez commented at NPR, Obama's new policy also transfers wealth from lower-income people to higher-income people, writing that it is

Political pandering at its best. . .The Fed data shows that the average student loan debt is about $25,000. Less than a new car loan (which has a higher interest rate and five year payback). The average new college grad makes $20,000 more per year than their non-grad peers. So they could pay it back in a little over a year if they lived like their peers. The average college grad makes $850,000 more over their lifetime than their non-college peers. So why shouldn't they pay back Their loan, which enables Their future income? But no, we are expected to spend taxpayer dollars to subsidize a group that is already in the top half of national income so that they can buy a TV set, a new car, and stuff.

We earlier discussed how harmful federal financial aid policies like the 90-10 rule already encourage colleges to jack up tuition, and actually leave students poorer than before.

The high student loan debt encouraged by Obama poses a major risk to the economy, judging from a recent Federal Reserve report. But Obama's budget proposals perpetuate perverse financial aid policies that encourage colleges to increase tuition, driving up student loan debt that now exceeds $1 trillion. While most graduates do not have large debts, a minority of students, such as graduates from third-tier law schools, have huge debts, sometimes as a result of ignoring obvious financial risks.

Law school tuition is funded heavily by student loans. As the ABA Journal notes, "Law students . . . are treated generously as future professionals and able to borrow, with virtually no cap, significantly more money than undergrads." Meanwhile, law school tuition rose nearly 1,000 percent after inflation since the late 1950's. As law professor Brian Tamanaha notes, at 20 expensive low-tier law schools, most students never will be able to fully repay their student loans, since they won't find desirable jobs.

Under income-based repayment programs, the federal government will write off much of these foolish law students' loans, and they will not even have to repay what they are capable of paying, since their payments will be limited to less than 10 percent of their income. Instead of cutting spending - one fourth-tier law school paid its dean $867,000 per year - these law schools will respond by increasing tuition even faster, since the increased tuition will be paid for by taxpayers when the borrowed tuition is later written off. All to subsidize low-quality law schools that are often economically harmful.

Taxpayers, many of whom "work in lower-paying jobs than their degreed compatriots," will pick up the tab for the written-off student loans. Even the liberal New America Foundation calls federal programs like Pay As You Earn a "huge giveaway to" undeserving and imprudent borrowers, as its Jason Delisle explained in an interview with Bloomberg Businessweek.