Hiltzik: Forget tariffs — GOP proposals on student loans will crack the economy

Yahoo

2 days ago

While economists and the general public are preoccupied with the threat to U.S. economic growth stemming from Donald Trump's tariff policies, serious as that is, they may be overlooking another serious threat.
This one comes from Trump's approach, abetted by Republicans in Congress, to the student loan crisis.
It's not a trivial matter. Nearly 43 million Americans owe a combined $1.6 trillion in student debt, according to figures from the U.S. Department of Education. Efforts to relieve borrowers of this weight invariably proposed by Democrats have been stymied by conservatives on Capitol Hill and federal courts.
"Instead of helping the 5 million borrowers that have fallen into default and the millions more that are behind and now at risk of default later this year, this Administration appears set on inflicting massive economic harm on millions of Americans.
Aissa Canchola Bañez, Student Borrower Protection Center
Now things look worse. There's no longer any talk in Congress of student loan relief. It's been supplanted by partisan efforts to increase the burden, by raising the costs of student loans and closing off paths for struggling borrowers to manage their payments.
"Instead of helping the 5 million borrowers that have fallen into default and the millions more that are behind and now at risk of default later this year, this Administration appears set on inflicting massive economic harm on millions of Americans—a decision that will further drag down an already struggling economy,' Aissa Canchola Bañez, policy director for the Student Borrower Protection Center, said recently.
The damage wreaked by Trump policies on student loans is already showing up in economic statistics. According to a report by the Federal Reserve Bank of New York, about 9.7 million student loan borrowers have seen their credit scores plummet since late last year, when delinquencies and defaults on those loans began to be listed on credit reports.
Many borrowers who enjoyed superprime credit scores (760 or higher on scales that typically top out at 850) could see their scores decline to subprime levels below 620. For those borrowers, the results could include "reduced credit limits, higher interest rates for new loans, and overall lower credit access," the N.Y. Fed reported.
The credit score declines resulting from the resumption of college loan payments was a factor in a sharp increase in the rejection rate for mortgage refinancings, to nearly 42% in February from 26.7% a year earlier, to 14% on car loans from 1.5% a year earlier, and to 22% on credit card applications from 16.6% over the same period.
Read more: A Wall Street solution on student loans that benefits (surprise!) the rich
The consequences could be even broader. Many landlords check credit scores to judge potential tenants, those with low scores might be turned away. Fewer mortgage refinancings, auto purchases, and less credit generally are all drags on the economy.
It's true that payments on student loans resumed during the Biden administration. Payments were suspended on federal student loans and and interest rates temporarily set at 0% during the pandemic emergency, beginning March 13, 2020. The pause ended as of October 2023, but the Biden administration provided a one-year "on-ramp" during which missed or delayed payments wouldn't show up in borrowers' credit reports. That ended early this year, triggering the credit score crash for borrowers in arrears or default.
Biden's efforts to relieve the burden on millions of student borrowers were stymied by federal court rulings in lawsuits brought by conservative activists. More recently, the Trump administration has proceeded to tighten the screws on borrowers.
On April 21, Education Secretary Linda McMahon announced that defaulted loans would be put in collection, subjecting the borrowers to having their wages garnished and their federal tax refunds and even Social Security benefits seized to make the payments. (Responding to a public uproar, the administration backed away from plans to take Social Security benefits from an estimated 450,000 defaulting borrowers aged 62 and older who are receiving Social Security.)
'American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,' McMahon said.
Pressure on households struggling to afford higher education will be intensified by provisions in the budget bill passed narrowly on May 22 by the GOP majority in the House. The measure, which is pending before the GOP-majority Senate, takes several whacks at student aid and consequently the accessibility of higher education.
Read more: Hiltzik: Republicans attacking student loan relief as a taxpayer burden got their own degrees on taxpayers' dime
Among its provisions are these:
— A change in the calculation of permissible student loans. Under current law, the figure is based on the cost of the program a student is attending. The proposal would peg loans to the median cost of all similar programs. That would leave students at higher-priced universities (such as private institutions) without the ability to access federal loans for the full cost of their education.
As it happens, no system currently exists for determining the median prices. At the Department of Education's office that would make the calculation, almost all the employees have been fired.
— The bill eliminates direct subsidized student loans for undergraduates, which don't accrue interest while the borrower is in school.
— The bill raises the maximum in federal loans that a student can take out to $50,000, up from the current $31,000. But the current limit includes up to $23,000 in subsidized loans. Since those would no longer exist, the full amount would be in costlier unsubsidized loans. The Student Loan Protection Center calculates that the average borrower who takes out the maximum annual loan amount would pay nearly $2,900 more in interest over the current amount.
— The GOP would eliminate the SAVE plan, which was implemented by the Biden administration but blocked by a federal appeals court ruling in a lawsuit brought by red states. The SAVE plan required enrollees to pay 5% of their discretionary income annually, with unpaid balances forgiven after 20 years (25 years for those with graduate loans). Those with original loans of $12,000 or less would have their balances forgiven after 10 years. Elimination of the plan would affect about 8 million student borrowers.
— The GOP would scrap rules allowing borrowers to temporarily defer payments due to unemployment or economic hardship and limits. It also places new limits on forbearance — a temporary pause on loan payments — which states loans can't be in forbearance for more than 9 months during any 24-month period.
Read more: Hiltzik: Are Republicans who got pandemic debt relief hypocrites for complaining about student debt relief? Yes
For all that Republicans crow about removing the burden on taxpayers from the student loan crisis, the real beneficiary of these changes would be the private student loan industry, such as banks and private equity firms, which long have hankered after the opportunities created by student loans. With fewer options available from federal programs, student borrowers would increasingly be thrust into the welcoming arms of Wall Street.
That's a problem for student borrowers, because the private lending industry has a wretched history, rife with deceptive practices. Private lenders were the subject of more than 40% of student loan-related complaints to the Consumer Financial Protection Bureau since 2011, even though they accounted for only 8% of outstanding loans. Private loans, moreover, lack some of the consumer protections traditionally provided by government loans, including deferrals, and typically carry higher interest rates.
With their actions and proposals, McMahon and the GOP lawmakers have underscored the majestic hypocrisy of the student debt debate. Among the most common arguments against relief is that canceling existing debt would be unfair to all those who already paid off their loans. As I've explained in the past, this is the argument from pure selfishness and a formula for permanent governmental paralysis.
In a healthy society government policy moves ahead by taking note of existing inequities and striving to address them. Following the implications of the 'I paid, why shouldn't you' camp to their natural conclusion means that we wouldn't have Social Security, Medicare or the Affordable Care Act today.
Among the most common claims is that debt relief would disproportionately benefit wealthy families; in fact, low-income households would benefit the most, the Roosevelt Institute has shown.
Read more: Hiltzik: Here's why the arguments against canceling student debt make no sense
As I pointed out last year, among the Republicans who weighed in with tendentious lectures about meeting one's obligation to pay back a loan were members of Congress who had taken out loans of hundreds of thousands of dollars each from the pandemic-era Paycheck Protection Program — and had them completely forgiven.
The GOP's lame defense was that the PPP loans were not expected to be repaid, if they were used to keep the borrowers' workers employed during the pandemic. Couple of problems with that: Days before Biden took office, the Small Business Administration deleted almost all the database red flags designating potentially questionable or fraudulent loans subject to further review. The red flags included signs that a recipient company had laid off workers or were ineligible to participate in the program.
As many as 2.3 million loans, including 54,000 loans of more than $1 million each, thus may have received a free pass.
Then there's the questionable ethics of elected officials taking massive advantage of a program they themselves enacted. They could have made themselves ineligible, but where's the fun in that?
I observed separately that many congressional critics of loan relief had themselves received their college, graduate and professional educations as gifts from the taxpayers: They had attended public (i.e., taxpayer-supported) state universities, typically in an era when tuition for state residents was much lower than today, even accounting for inflation.
Among those who were apparently educated on the taxpayers' dimes is Secretary McMahon, a North Carolina native who holds a degree from East Carolina University, a public institution supported by the taxpayers of North Carolina. I asked McMahon's office to reconcile her statement on student loans with her education at a public university, but received no reply.
The threat to the economy is real and immediate. Households burdened with student debt tend to delay or forgo homeownership and face difficulties in starting a family or building up savings. Eradicating student debt, or even materially reducing its burden, would produce a significant economic stimulus. But who in the White House or on Capitol Hill is even listening?
Get the latest from Michael HiltzikCommentary on economics and more from a Pulitzer Prize winner.Sign me up.
This story originally appeared in Los Angeles Times.