Bad Student Loan Debt: $435 Billion and Counting

by James A. Bacon

“A billion here, a billion there, and pretty soon you’re talking real money,” Illinois Senator Everett Dirksen said many years ago. With the passage of time and inflation, we might need to update the quote to “a hundred billion here, a hundred billion there…” But even by the debased standards of 2020, the $435 billion that the federal government likely will have to write off as bad student loan debt amounts to real  money.

The losses projected by the most authoritative study yet, reports the Wall Street Journal, are far steeper than prior government forecasts. Last year the Congressional Budget Office that the government would have to write off only $31.5 billion.

The problem has long been evident. “We make no attempt to evaluate the quality of the borrower, the ability to repay, the effectiveness of the loans,” said Douglas Holtz-Eakin, a former CBO head who now heads the American Action Forum. Not surprisingly, borrowers with subprime credit scores are among the most likely to default. As with all government excesses, taxpayers will be stuck with the tab — unless the government just monetizes the bad debt and accelerates the nation’s headlong rush to Boomergeddon, the society-crushing collapse of federal finances when lenders finally conclude they will never be repaid.

Sooner or later there will be a reckoning for America’s — and Virginia’s — system of higher education. Even a nation as profligate as the United States — estimated 2020 budget deficit this year, $3.7 trillion, national debt $27 trillion — has to staunch the losses. The nation cannot afford to continue shoveling money into the abyss. Any meaningful reform, however, would be traumatic for the many higher-ed institutions whose business models are predicated on indiscriminate lending to students.

In Virginia, federal aid to students to Virginia’s public four-year institutions amounted to $1.032 billion in the 2018-19 academic year. Aid to community college students was $1.34 million, and to private nonprofit institutions $791 million. All told, federal aid to 234,000 Virginia students exceeded $2.1 billion in a single year.

Tighter lending likely would favor students working toward degrees that have a higher value in the marketplace than others — continued loans for engineering students and fewer loans for students majoring in interdisciplinary feminist studies. Reforming the student loan program also would favor students at institutions with higher degree-completion rates than those with lower rates.

Colleges and universities would have to invest more resources into ensuring that students don’t drop out. And here’s the real killer, institutions would have to be more selective about whom they admit in the first place. No more admitting students to fulfill demographic quotas with no thought about their ability to repay their loans. Any tightening would make it difficult for students from lower-income families to attend college. But given the frightfully high percentage of such students who drop out of college with a load of student debt they can never repay, that might not be an altogether bad thing.

Turning off the money spigot might have one beneficial effect. Easy money has allowed many colleges and universities to grow fat and happy, more attentive to the needs of their internal constituencies rather to the students they were set up to serve. Student loan reform would compel them to refocus their missions, slash costs, shed peripheral enterprises and lower the cost of attendance. The main people to suffer under that scenario would be the legions of pampered professors and administrators.

Crocodile tears.