OPINION:
President Joe Biden’s decree on student loans has drawn criticism from left and right, but few are voicing the threat it poses to economic stability and constitutional order.
Established as a Great Society program, federal student loans provided more equal access for working and middle-class students to quality higher education once reserved for the wealthy or gifted.
However, the indiscriminate nature of the program allows universities to sell programs that offer little prospect of a good job and to overwhelm the youth population.
About half of freshmen either leave college without a degree or earn less than the average high school senior. However, many are burdened with large debts that they cannot repay or are struggling to repay.
Federal undergraduate loans are capped at $57,500 for financially independent students—$31,000 for those with parental support—but grad school borrowing is virtually unlimited.
It doesn’t matter whether you study philosophy or electrical engineering.
The typical NYU Masters in Film Studies owes $113,180 and earns $30,581 three years after graduation. Columbia’s undergraduate numbers are even worse, and the problem is endemic in less professional undergraduate and non-elite law schools.
Universities use the profits to subsidize bachelor’s degrees, bloated administrations and low teaching loads.
All of this discourages college students from choosing wise majors and discourages high schools from directing more young people into higher-paying apprenticeships and training programs.
University priorities for financial aid are sometimes questionable.
NYU offers free tuition for medical school.
Given that medical schools are among the most expensive businesses to run universities — and medicine is one of the few fields that offers graduates both a handsome income and virtually guaranteed employment — free-riding poses huge equity issues when the institution saddles students People who are often end up doing low-paying work with massive debt.
According to White House filings, the cost of a four-year degree at a state university has risen about two-and-a-half times as fast as inflation. But universities generally use few resources to warrant it — buildings, PhDs, managers of questionable skill, and all are subsidized by state grants and federal funds.
All of this shrinks the productive labor force, misallocates capital and saps growth – and encourages universities to pump up prices.
The President awards $10,000 to individuals earning less than $125,000 — $20,000 to couples earning less than $250,000. And doubles those numbers for people who have received Pell Grants.
The immediate budgetary impact will be approximately $460 billion, giving former students a massive boost of new spending power. That should add 0.3% to 0.5% to inflation, completely overpowering the net revenue effects of the Anti-Inflation Act.
Even more ominously, the required repayment rate for income-based repayment plans will be reduced from 10% to 15% to 5%, and for incomes above 225% of the federal poverty line — from 125%.
After 10 years, the credit is awarded – not the current 20 years. Think what that means for the typical NYU or Columbia film scholar making $30,000.
In 2022, 225% of the poverty line is $30,578. NYU can ask for $75,000, $150,000 or more and impose debts of $100,000, $300,000 or even more
$1,000,000 for students. After graduation, they can sign up for near-zero debt repayments and have it all forgiven in 10 years.
This morass will encourage America’s most irresponsible and administratively challenged CEOs – our university presidents – to steal tuition and spend recklessly as never before.
Everything will be bonded when the federal government borrows to fund the borrowing, and either the Federal Reserve will print money to buy equivalent securities or the supply of outstanding US Treasury bonds will skyrocket.
What is terribly underestimated is that while Treasuries are not money per se, they come close. Companies and rich individuals use these as sources of liquidity.
The Federal Reserve’s control of the money supply and inflation is further compromised by this reckless fiscal policy.
The legal justification for an executive order, as opposed to legislation, for all this irresponsibility appears to be a 2003 law allowing the Secretary of Education to waive or amend student loans in a national emergency. Two years after the COVID-19 shutdowns, it is hard to justify that we are in such an emergency.
Companies are ordering workers back into offices and pandemic protocols are being relaxed, for example by airlines.
The law is arguably applicable on a case-by-case basis — it’s not a brief for blanket forgiveness.
All of this reeks of presidential hubris to squander congressional power.
Unfortunately, it seems difficult to identify individuals who are entitled to challenge this madness in court.
Mr. Biden likes to point the finger at his predecessor as a threat to democracy. He might do well to look in the mirror.
• Peter Morici is an economist and Emeritus Professor of Economics at the University of Maryland and a national columnist.
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