Why is the Government Saving Money by Driving Students Into Debt?

Dec 21, 2011Bryce Covert

The latest budget deal cuts Pell Grants, one more blow to the old system that helped students pay for college directly.

It's no secret that college graduates are struggling under huge debt loads. The overall debt owed is set to hit $1 trillion this year.

Rising debt loads are fueled by two simultaneous trends: soaring tuition and falling assistance. As James Surowiecki writes, "Since the late nineteen-seventies, annual costs at four-year colleges have risen three times as fast as inflation." And the days when a college education could be financed through government assistance like the GI Bill or Pell Grants are quickly disappearing. Grants used to cover two-thirds of financing an education. Now two-thirds of college financing comes from loans.

In the face of these pressures facing graduates, the government might be expected to offer more assistance. And Obama announced an executive order in October that tries to ease burdens. It allows grads to cap repayments on their federal loans at 10 percent of their discretionary income come January (which is two years before it was already set to happen). After 20 years, all the remaining debt on those loans would be forgiven -- five years earlier than it would have been without his order. On top of this, some borrowers with more than one federal loan can consolidate them, which could reduce their interest rates (slightly). But even that most immediate impact, consolidating loans, is only likely to save the average borrower between $4.50 and $7.75 a month, a barely noticeable sum.

Now news came out this week that the last-minute budget deal to fund the government and avert a shut down included cuts to Pell Grants. The maximum grant will be preserved at $5,550, but changes to the eligibility criteria will make as many as 100,000 recipients ineligible. The maximum amount a family can earn without contributing anything toward tuition will drop from $30,000 to $23,000. It also retroactively limits the number of semesters that a student can use grants, from 18 to 12. In sum, these changes will mean less money for fewer people to pay for a college education.

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Even as the government has shifted further and further away from directly subsidizing higher education -- i.e. giving out money that doesn't have to be paid back -- it is still subsidizing education costs. It just does so through multiple tax breaks for student loans, which are far less visible to the average American. And the cost of these tax code subsidies isn't cheap. As my colleague Mike Konczal notes, the government shells out about "$22.75 billion... through the tax code to make college tuition and student debt more manageable." This means that in order to finance an education, the government is basically assuming students and their families will take on huge debt burdens.

Compare that number to the total cost of the Pell Grant program. It cost the government $36.5 billion in 2010. While that's a larger sum, the government is still shelling out both amounts -- but only looking to cut money from the aid that doesn't entail students miring themselves in debt.

Those tax subsidies should also be compared to what it would cost the government to simply provide free public higher education: by Mike's estimate, $15-$30 billion. If the government is looking to save money, it could do worse than shifting funds lost to tax breaks that subsidize indenture to giving out aid directly through either grants or simply free public ed. In fact, if it no longer had to lose money through tax breaks or pay out money for Pell Grants, the savings of free public colleges could be pretty nice.

Because this debt does have a real life impact on the students who carry it. As I've written before, research shows that higher debt loads narrow the career choices students make upon graduation. By cutting down on direct aid and therefore pushing more students toward debt, the government is complicit in Wall Street's brain drain. And this debt can hang over them for an entire lifetime. Almost 10 percent of people ages 55-64 still have student loan debt. The bankruptcy code doesn't allow this type of debt to be discharged.

As unemployment rates and income levels make clear, a college education is an important asset. The government has choices it can make in how it helps people finance those educations. One path leads to debt loads that skew students' life courses. Why would we choose that one?

Bryce Covert is Editor of New Deal 2.0.

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