Student Loan Bailout On the Horizon?

Watch this video at CNBC.

Go ahead. Don’t be reading this unless you’re finished watching the video. Consider the video a recap of my previous post on student loan debt, with Larry Kudlow‘s last sentence – that he hopes we aren’t entering bailout country – is the topic of this post.

It’s looks like Kudlow’s worst fears will be confirmed.

The Proposal

The proposal is by Rep. Hansen Clark, called the Student Loan Forgiveness Act of 2012:

H.R. 4170 would forgive student loan debt for those who have paid 10 percent of their discretionary income toward their loans for 10 years and would cap interest on federal student loans at the current rate of 3.4 percent. Individuals who go into teaching, public service or practice medicine in underserved areas would have their debt forgiven after only five years.

So all you have to do is wait 10 years and then voilà! You’re free!

Argument In Favor

Those who support the $1 trillion student loan bailout tug on your heartstrings and say those poor students…we need to help them! Everyone deserves a college education no matter what!

The economic argument is that with the $1 trillion forgiven, that money will be spent elsewhere, resulting in a stimulus that will benefit the economy.

Typical Keynesian logic.

Are supporters of the bailout right?

No they are not correct.

First, the argument that the bailout would benefit the economy is a faulty one. The thing is is that no new wealth would be created, money would simply be reallocated from part of the economy to another. At best the net effect on the economy would be zero. Nothing would change.

Plus, the bailout would just be added to the national debt – meaning we students still have to pay off the debt anyway! Instead of paying off student debt we pay off an even higher national debt!

Bailouts in general are just not good policy. They don’t solve the problem, if anything bailouts exacerbate the problem.

The problem is exacerbated because bailouts continue to incentivize bad behavior, as whoever receives the bailout figures that they will just get another bailout and don’t focus on solving the root of the problem.

In this case, the root of the problem, a nationalized student loan industry that doesn’t have much in the way of lending standards, is not solved.

Students will still receive loans who are unable to pay them back, especially since the bailout will only provide more of an incentive for students to take student loans. After all, they have to do is wait ten years!

Tuition will still rise. The education bubble will continue to worsen.

Also, the bill allows for students to take a loan and then simply wait ten years and be debt free. Freeloading much?

The difference is that the taxpayers are on the hook $1 trillion that will never be paid back. Ever. How’s that for forgiveness?

What do we do?

Basically this bill should be opposed. Contact your local congressmen/senator to oppose the bill.

Instead, what should happen is what I suggested in my first student loan post, for privatization of the student loan program.

As students, we should be making sure we have a career plan in front of us before any student loan is taken.

A bailout does not incentivize any meaningful change. In the end, it’s just another waste of money.

The following two tabs change content below.
Aaron Bandler

Aaron Bandler

Aaron Bandler is a sophomore at California Polytechnic State University San Luis Obispo pursuing a Journalism major and an Economics minor. Aaron's main passion is politics. As a staunch conservative Republican, he advocates for conservatism every day of his life. Aaron is also an avid sports fan who passionately follows the San Francisco Giants and 49ers. Outside of sports and politics, Aaron enjoys playing guitar and listening to classic rock music like The Who and Led Zeppelin as well as hanging out with family and friends.
Aaron Bandler

Latest posts by Aaron Bandler (see all)