Bubble: Student Loans

Obama's Student-Loan Debacle

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02/05/2015 06:58 PM ET

Debt: Having spent years chastising bankers for making risky loans, President Obama is now responsible for a $22 billion shortfall in the student loan program. Guess it's not risky to gamble with other people's money.
Politico has uncovered what it rightly calls a bombshell hidden in the fiscal 2016 budget that Obama proposed on Monday: The federal student loan program "had a $21.8 billion shortfall last year, apparently the largest ever recorded for any government credit program."
That, Politico's Michael Grunwald notes, is bigger than the entire budget for NASA, the Interior Department and the EPA.
Obama can't blame President Bush for this one, since it's a direct result of his determination to have the government take over the student loan business.
Early in his first term, Obama complained that "we have a student loan system where we're giving lenders billions of dollars in wasteful subsidies that could be used to make college more affordable for all Americans." So he set out to eliminate a 40-year-old program that provided guarantees to lenders so they could make high-risk tuition loans at relatively low rates. And he succeeded in 2010.
As a result, the federal Direct Loan Program, created under President Clinton as a "public option" to private lenders, is now the only game in town. Not surprisingly, between 2009 and 2011, the number of these government student loans shot up 62%.
Today, the Education Department has an eye-popping $740 billion in outstanding loans, making it the government's second biggest lender after the Federal Housing Administration.
To make matters worse, Obama started making it easier to repay the loans — or more appropriately, not repay them. In 2011, he announced a "pay as you earn" program that lets borrowers set monthly loan payments at no more than 10% of their discretionary income. And after 20 years, the government eats whatever's left.
That's what's behind the current shortfall, which threatens to get much bigger if the program isn't reined in. Barclays Capital warns that the program could wind up $250 billion in the hole over the next decade.
"Behind closed doors," Grunwald reports, "officials in the White House budget office and the Treasury Department have criticized the Education Department's loan models as overly optimistic, with some officials pushing internally for third-party audits."
And what are taxpayers getting in return for unwittingly taking on all this risk? Despite the massive increase in federal aid, Obama hasn't made college less expensive.
The average tuition — net of all the government grants and subsidies — was $3,000, up from $2,100 in 2010, according to the College Board. Net tuition at private colleges climbed over those years as well.
Colleges apparently took all these generous new subsidies and raised their fees, leaving the prices paid out of pocket by families and students relatively constant.
College administrators might not be dumb. But Obama's college education policy sure is.

Read More At Investor's Business Daily: http://news.investors.com/ibd-editorials/020515-738158-student-loan-program-faces-a-massive-funding-shortfall-webhed-obamas-student-loan-program-is-22-bil-in-the-hole.htm#ixzz3QyTOtCHC
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