The US Federal Student Loan Program is a Failure

John Cook
John Cook
May 11, 2019 · 5 min read

It should be no surprise to anyone but in the event it’s not crystal clear: The US Department Federal Student Loan program is an absolute failure. It is a social experiment gone wrong and now serves as another cost center to American taxpayers. The Congressional Budget Office, a government agency which provides budget and economic information to Congress, has concluded that America’s student loan program will now cost taxpayers $31 billion dollars over the next 10 years. This adds insult to injury because in 2013, the CBO estimated the program would yield $184 billion dollars in profit for the US Government.

The incompetency of the US Department of Education

Imagine if this were a corporate enterprise and in a 5-year window revenue swung from $184B in profit to $31B in losses? Rational minds would prevail and the entity would be forced in bankruptcy, liquidation and a more efficient firm would enter the market and serve the gap left from the defunct firm. But rational minds don’t exist within the US Government and certainly not within the disaster known as the US Department of Education. Why is the federal loan program now posting a $31B loss?

How do we explain this insanity? The answer is simple, but accepting it is hard: We (American taxpayers) are giving 18-year-olds a BLANK check to attend college and major in left-handed puppetry. This is our fault because our federal banking system and its lenders would never lend $20,000, $40,000 or $100,000 to an 18-year-old. So how do we respond? By guaranteeing loan repayment to lenders. Let that sink in, the banks *know* these 18-year-olds have a high probability of default and in an open market, wouldn’t lend a penny to them. The US Department of Education has to guarantee (promise) that if/when these 18-year-olds fail, taxpayers will step in and save them. When American taxpayers guarantee student loans, tuition skyrockets. Why does tuition skyrocket? By providing unlimited capital to college students for tuition, colleges are able to command an unlimited amount for tuition. The barrier to entry for an 18-year-old to obtain a $50,000 student loan is an “online exam” which takes 30 minutes to complete. It takes more work to get a car loan than it does a student loan. The net result? College tuition which rises at 12x the rate of inflation. Madness.

The study by the CBO reveals 2 additional data points which further justify the shutdown of this failed program. First: the interest rates set by the agency for its PLUS loan program.

The PLUS loan program’s interest rate will reach an estimated 8.35% with a max cap of 10.50%. This means that for every 100 dollar student loan payment you make to the Department of Education, 10 dollars will be allocated to interest. In addition to the insanity of the increased interest rates, we find that over $3B yearly is allocated toward’s student loan administration. Think of the incompetent bureaucrats swimming in a sea of mediocrity pushing paper from pile 1 to pile 2. Complete waste of money.

So what exactly are these incompetent cogs in the US Department of Education doing with a $3 billion dollar budget? Doing what they do best, destroying the lives of the middle class. Let’s look at the “Public Service Loan Forgiveness” program. This program ‘forgives’ student loan debt if you meet a specific set of criteria which includes: on-time payment for 120 months, working for a government agency (no thanks), among others. Since it’s inception PSLF has received 86,006 applications for forgiveness. As of 3/31/19, only 864 applications were actually forgiven.

98.9% OF ALL APPLICATIONS FOR FORGIVENESS WERE DENIED. A 3 billion dollar cost center set up for the sole purpose of administrating student loans then denying forgiveness based on an irrational set of requirements unattainable to 99% of Americans.

So how do we solve this disaster?

There are 2 solutions which we need to enact immediately. First, cancel the US Department of Education’s Federal Student Loan Program. By eliminating the unlimited access to capital, demand (# of people who want to attend ridiculously priced universities) will decrease. When demand decreases, supply (the # of worthless private universities selling liberal arts degrees for $100k) will also decrease. The net result is cheaper tuition. Keep federal programs like the Pell Grant available to help those truly in need and encourage a 2-year community college transfer program for pennies on the dollar.

With the Federal Student Loan Program shut down, we can now address the elephant in the room: the $1.5 trillion dollar student loan debt fiasco. We need to eliminate the failed Student Loan Forgiveness Program and mandate a 33% post-tax automatic deduction against all individuals with an outstanding student loan balance. That means if you make $1,000 a month 33% or $333 will go towards your student loan debt. If you make $10,000 a month $3,333 will go towards your student loan debt. Enforce this plan until all student loan debt obligations paid. Then and only then can we move on from the failed social experiment known as student loans.

This story is published in Educated but Broke — a publication dedicated to helping you fight student loan and consumer debt by providing real-life, practical advice.

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