Federal student loan programs create perverse incentives

by Grace

Two problems with college loan forgiveness programs:

1.  They encourage students to choose less-valuable majors, according to George Leef.

.. income-based repayment would lessen or even remove the incentive that students now have to think prospectively about the cost/benefit ratio of college. With income-based repayment in place, the government is in effect telling students, “Relax—if college turns out not to do much to increase your income, you won’t have to dig deep to cover the costs.”

2.  They create “a perverse incentive for students to take out large loans they have no intention of paying back in full”, according to Walter Russell Mead.

… This is particularly true for graduate students, who have no limits on the size of the loans they can take out. As a result, the program has gone from “a safety net for undergraduates [to] a very large tuition assistance program for graduate students.”

Both income-based repayment plans and public service loan forgiveness programs absolve participants from paying back a significant percentage of the money they borrowed.

Mead describes how government policies are “Blowing Air into Debt Bubble”.

Over the past few years, the college cost crisis has evolved from merely an important issue facing parents and students into a serious national problem that could impact the future of the country. Moreover, most government programs designed to address the problem have only made it worse, inflating the bubble by encouraging students to borrow and giving colleges few incentives to lower prices. Federal student loans are the biggest offenders in this regard, but even other, more targeted programs have had this effect.

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