Student Loan Forgiveness Isn't Free

We hear a lot about how health care in the U.S. costs more than it does in than any other country. We hear less about the fact that higher education also costs more here than in any other country.
At what cost? Photographer: Michael Okoniewski/Bloomberg

We hear a lot about how health care in the U.S. costs more than it does in than any other country. We hear less about the fact that higher education also costs more here than in any other country, and for many of the same reasons: We provide a very high-quality product to those who can pay, funded through a combination of public and private funds, and unlike many other countries, we do not send in the heavy hand of the state to control costs and prices by fiat. Instead, we subsidize pretty much whatever consumers decide to consume and producers decide to give them.

This has long been a source of anxiety for parents. It became a source of anxiety for students, too, as loans covered an increasing proportion of their tuition. Now it's a source of anxiety for the government, because guess who's being asked to chip in?

Over the past decade or so, there's been a big expansion of loan-forgiveness programs. Those in public-interest work, the military or certain professions working in underserved areas can get their loans forgiven entirely. For the rest of us, there's income-based repayment, or "pay as you earn," which caps your loan payments at 10 to 15 percent of your income, then forgives any balance after a couple of decades.

With tuition so high and the economy what it is, a lot more people are availing themselves of these opportunities. The Brookings Institution estimates that this could eventually become very costly:

As we explain above, we do not believe that our analysis can be used to produce credible estimates of the total cost of these income-based repayment programs, in large part because we only analyze data on bachelor's degree recipients, and any such estimates are subject to significant uncertainty given the several assumptions built into the model (including high rates of participation). But a back-of-the-envelope calculation provides a sense of the scale of the cost of these programs. In the 2010 fiscal year, just over four million postsecondary student borrowers entered repayment. Applying our per-borrower cost estimates suggests total per-cohort costs in the ballpark of $11 billion for IBR and $14 billion for PAYE. Our estimates assume nearly universal participation, so these totals are likely to more accurately reflect the cost of a passive repayment system, where borrows enter income-based repayment by default, than the existing programs which require borrowers to actively apply.

That's just for bachelor's degrees -- not really expensive programs such as law, business and medical schools. Of course, many of those people expect to have high incomes that would make an income-based program less attractive. On the other hand, I, too, expected to have a high income when I got my master's degree in business administration at the University of Chicago's Booth School of Business in 2001, and I ended up as an entry-level journalist instead. If I could have tapped the Income-Based Repayment Plan, I'd have been eating a lot less ramen and luxuriously taking the bus or the subway rather than walking to work. And whoops! There goes the deficit.

It's also worth noting what these calculations don't assume: that we allow the Internal Revenue Service to tax the value of forgiven debt. In case you hadn't heard, that generous loan forgiveness comes at a price: When your 20- or 25-year loaniversary rolls around and the government cancels what remains of your debt, the IRS will treat the value of the forgiven debt as taxable income to you. That is going to whack the sort of people who end up on IBR with a huge, unexpected tax bill. But it reduces the cost of the program, probably by about a quarter to a third.

The analysts at Brookings assume -- as I do -- that these provisions will never actually take effect. The first time some sympathetic single mother appears on television with the $30,000 tax bill for her student loan forgiveness, some sympathetic congressman will appear on television with a bill that has 200 co-sponsors to make these programs tax-free. And thereby, much more expensive.

Compared with the entire federal budget, $25 billion a year is not a fortune. On the other hand, it's a fortune compared with almost anything else. And it is a direct subsidy to the best-off members of American society, particularly those with advanced degrees.

It also represents a threat to U.S. education. Administrators love the subsidies. But if the subsidies get out of hand, they're going to be followed by calls for price controls -- just as we're hearing in U.S. health care right now.

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