Obama: We Have to Do Something About Student Debt and This Is Something

President Obama, keenly aware
that he has to keep millennials on his side to prevent the
Democrats from getting trounced at the polls in November, wants to
confront the student loan crisis. But the current mess is itself
the product of bad incentives engineered by government planning.
Obama’s approach won’t plug the trillion–dollar debt sinkhole, and
the one favored by Senate Democrats may worsen it.

Obama
signed an executive order on Monday increasing the number of
debtors who will be allowed to repay their federal Stafford student
loans under more lenient circumstances. More borrowers can now
enroll in a plan that obligates them to pay only 10 percent of
their income every month as they work off their debts. After 20
years, the government
writes off their debts entirely (or after just 10 years, if the
borrower is working in the all-important field of public or
government service).

Previously, only those who borrowed loans after 2007 were
eligible for the repayment plan. It is now available to
everyone.

The president also endorsed a bill sponsored by Sen. Elizabeth
Warren (D-Massachusetts), that would allow students to refinance
their loans at lower interest rates. He called her proposal a
“no-brainer.“

“I’m only here because this country gave me a chance through
education,” Obama said. “We are here today because we believe that
in America, no hard-working young person should be priced out of a
higher education.”

That’s a nice sentiment, albeit one that is completely at odds
with what Warren’s bill actually does. When federal lawmakers
forgives debts—in part or in whole—they reward students who
borrowed recklessly.

They also incentivize universities to raise tuition prices.
College administrators know that they can get away with demanding
more money, because students will take out more loans, confident
that the government will bail them out if they run into trouble—and
the government will stick the taxpayers with the bill if the
students aren’t able to pay.

Or, as the Cato Institute’s Neal McCluskey put
it:

Making student loans cheaper, which includes indicating that
Washington will always soften your loan terms if politically
possible, mainly encourages students to
demand more stuff, and colleges to charge
more. They’re called “perverse incentives.”

Keep in mind that public universities have shown zero interest
in controlling their costs: Every year, they hire more
administrators and build fancier dormitories and sports stadiums.
But students will pay whatever they are asked to pay. They may
never find jobs, but as long as they commit to decades of public
service, their debts will eventually fall to someone everyone else.

This is what results from tackling college costs on the back
end, rather than upfront. But, as seems to be the case
with a chief executive who promised a
“year of action” in 2014, the government just needs to look
like it is doing something, even if that something is remarkably
shortsighted and contributing to the very problem it intends to
solve.

Something is always better than nothing, right?