The Student-Loan Scam

By Michael Medved, The Daily Beast

29 April 12

Why should cheaper loans for tomorrow's elites be subsidized by all taxpayers? A look at why President Obama's math doesn't add up.

oes it make sense for the government to take taxes from the big majority of Americans who never managed to win college degrees in order to subsidize the pricey education of the fortunate few who get to attend top universities?

Why is it fair to increase burdens on stressed-out working families so the feds can reduce future interest payments on student loans for members of the elite?

Isn't President Obama's current push to spend a $6 billion on college-loan relief precisely the sort of rob-from-the-poor-to-give-to-the-rich outrage that any conscientious progressive ought to oppose?

These are questions that even Mitt Romney and his fellow Republicans refuse to pose, as they retreat or temporize concerning the president's shameless student-loan scam. The big duel in Congress concerns the best way to pay for continuing the subsidized loans, with no real debate about the wisdom of the subsidy itself.

Republicans and Democrats alike feel so intimidated by the brute political power of college students and their families that no one will point out it's the beneficiaries themselves who ought to cough up the extra money. It's not unreasonable to suggest that they do so when interest rates revert to their normal, pre-2007 level on July 1st - especially since those students aren't obligated to begin making those interest payments or retiring their principal until they've completed their education or dropped out of school. In effect, our leaders suggest that future millionaire attorneys who graduate from Harvard Law School (as both Obama and Romney did) ought to get reduced payments on their student loans at the ultimate expense of all taxpayers - including janitors who toil away at the very Ivy League campus where the two presidential candidates once matriculated.

The lies surrounding this proposed ripoff ought to embarrass everyone who dutifully recycles them, but prominent reporters, perhaps recalling their own student-loan experiences, repeat the nonsense without blushing. For instance, the notion of crushing student-loan debt hobbling millions of U.S. families counts as an urban legend or deliberate distortion. According to figures from the New York Fed, a full two-thirds of the total student-loan debt is held by people under 30, suggesting that the great majority of borrowing is quickly repaid. President Obama's example of repaying his debts only at age 43 (when he was already a state senator) would count as atypical.

Moreover, borrowers owe a median of $12,800, a figure that the Associated Press describes as “an amount even advocates for student borrowers acknowledge is usually manageable and more than worthwhile factoring in the economic benefits of a college degree." Surely, borrowers who owe less than $12,800 don't need a massive federal rescue to save them from paying at most an extra $34 a month in interest.

Of course, the president prefers to talk about the average loan balance rather than the median, since that average is thoroughly distorted by a handful of big-time borrowers (like the Obamas themselves) who attended the nation's most expensive universities. As Josh Barro writes at Forbes.com: “A below-market interest rate for Stafford Loans is just another subsidy mechanism…. This pushes students, at the margin, to choose more expensive educational institutions than they otherwise would, and to finance more of their education with borrowing than they otherwise would. These incentives leave students more burdened with debt than they need to be, and they also make them less focused than they should be on price, allowing more tuition inflation."

The president cites his personal example as illustrating the need for federal help in keeping interest payments artificially low for those who borrowed hundreds of thousands to get blue-chip educations. “We only finished paying off our student loans about eight years ago," he told an adoring crowd at the University of North Carolina. "That wasn't that long ago. And that wasn't easy." But it shouldn't have been that hard, either - given the fact that the Obama tax returns (made public on the White House website) show that for at least five consecutive years before they finally retired their loans, the future president and his wife reported income in excess of $200,000 each year. In 2001 and 2002, the Obamas earned $272,759, and $259,394, respectively. What possible argument could they advance for the federal government to deploy taxpayer resources to reduce interest payments by a few hundred dollars for such a prosperous and privileged couple? As Jonathan Karl points out at abc.com, in those years the Obamas would fit the definition of “the rich" or of “millionaires and billionaires" that the president wants to tax at higher rates, not subsidize.

And there's scant justification for the government subsidizing decisions like those by Barack Obama to attend Columbia (as an undergraduate) and Harvard (for law school) rather than less-expensive schools. For instance, Mitt Romney managed to build a decent future for himself with an undergraduate degree from Brigham Young University, where even today tuition charges amount to less than one-tenth than those at Columbia, Obama's alma mater.

To the president (and to many others, no doubt) the value of an Ivy League education might justify any additional cost, but why not place those costs on the people who chose to incur them and who benefit most directly? While the value of my own Yale degree might be greater to me than the value of my wife's much-less-expensive UCLA degree is to her, there's no evidence at all that a costly Ivy League credential somehow provides more substantial benefits to the nation at large.

Of course, Yale and Harvard and Princeton might argue that they gain as institutions from enrolling students who need student loans to pay their exorbitant tuition, but those massively well-heeled universities could underwrite the costs themselves without taking any federal assistance whatsoever. Harvard, for instance, reported a 2011 endowment of $31.7 billion - up from $25.5 billion in 2005. This means that the endowment of the nation's richest university increased at an average rate of $1.04 billion per year even during the disastrous period of The Great Recession. Harvard could therefore allow every one of its 21,000 students to enroll tuition-free - and still see its endowment grow every year. Harvard reported that total student income, including all tuition fees, payments for continuing education, and even “board and lodging," amounted to $740,573,000 in 2011 - so even without collecting a penny in revenue from any of its students, the university still would have been $300 million richer at the end of the year.

Finally, there's an important point of reference for all those who say it's not worth worrying about a relatively trivial amount like the $6 billion a year that Obama wants to commit to continued interest-rate relief for recent university grads; after all, this sum amounts to less than 1 percent of an overall budget deficit of more than $1 trillion.

On another issue, however, the president treated an even less significant fiscal concern as worthy of a titanic political struggle. According to figures from the White House, the “Buffett Rule" to establish a new minimum tax for millionaires would bring the Treasury only $4.7 billion per year - considerably less than the cost of extending the student-interest subsidy.

Liberals would argue that the Buffett Rule merited a major fight despite its minor financial consequences because it illustrated an important issue of fairness. But they should then acknowledge that the proposal to continue the student loan scam deserves a comparable battle for much the same reason.

For an administration that claims it wants to help those who have been left behind by a crippled economy, it's hypocritical in the extreme to channel scarce federal funds to students who are moving ahead despite hard times. Rather than let university graduates pay off their loans on their own, the president wants to borrow more money from China to help them - and to court their votes. Conservatives oppose income redistribution from those who earned it to those who didn't, but even liberals should block income redistribution from the less fortunate to big winners in academia.