Leading Students to Serfdom (2011 Dec)

by Barry A. Liebling

The official reasons the federal government underwrites college student loans is to help students succeed in life and give the United States a competitive edge in the global market. In fact, whether by design or by accident, federal policies are putting students under the government’s heavy thumb and are leading them to serfdom. Furthermore, federal actions are putting a damper on the economy.

The Wall Street Journal has discussed how federal student loan policies will increase the national debt and ultimately burden taxpayers. While these negative consequences are certainly troubling they are not the end of the story. Even if the government’s policies were implemented for free – that is, not impact taxpayers directly – they would result in ugly outcomes.


Consider why students have more education debt now than ever before and how the federal government fueled this mess. A college education is stupendously expensive. The cost of obtaining a four year degree has ballooned dramatically over the last three decades. While there are several factors that contribute to tuition inflation a major player is the federal government itself. As the government increased the volume of educational grants and loans colleges took this as their cue to raise their fees. Of course, higher fees is the justification for the government to “invest” even more in “helping” students finance their education.

The old platitude of a student working her way through college and avoiding any debt is obsolete. Now more than ever taking on debt is the only way for many people to complete college. And, not coincidently, the government is the prime underwriter of student loans. Is it possible that some bureaucrats and planners are pleased with this cost spiral because it puts the fate of students in the hands of government?

When it is time for the student to pay the loan back things get interesting. According to The Wall Street Journal a new law went into effect in 2010 that has an “income-based repayment” feature. This means that students do not have to pay back any more than 10% per year on their loan of their “discretionary income.” The definition of “discretionary income” is set by the federal government. The important point is that this works just like the progressive income tax – the less a former student makes the less she has to pay each year. If 20 years go by and the loan is not repaid in full the debt is forgiven.

Consider how this incentivizes students. The attractiveness of obtaining a high paying job is diminished. A former student has to pay more each year if she goes into a lucrative field. There will always be ambitious people who will strive to do as well as they can in their careers. But the “income-based repayment” option “nudges” debtors to seek out jobs with modest remuneration. So much for helping college students succeed and making the United States competitive. Is this the way to fix a sluggish economy?

It gets worse. The Wall Street Journal reports that a 2007 law gives special privileges to students who decide to take a job in “public service.” This refers to government agencies as well as to non-profits. Debtors who elect to avoid the profit-oriented private sector and go into one of the “socially conscious, nobly motivated, helping professions” can get their loans forgiven after only 10 years.

Note how this will impact on naive students who are finishing school. When they go for their first job they will be “nudged” into looking to the public sector first. Why not trade a 20 year burden for a much gentler 10 year schedule? Once employed in “public service” think how punishing it might seem to the former student who considers moving to the private sector – 10 additional years of paying off a loan.

And what political message does the “public service” loan policy convey? It is a clear statement that government has antipathy for the private, profit-oriented part of the economy. It tolerates the private sector to the extent that it can be taxed to fund the “genuinely important, truly worthwhile” public sector. The tangible proof is that the federal government is bestowing favors on its own employees and those who work in non-profits while penalizing those who are employed by private companies.

Do not overlook the electoral implications of this policy. Greater numbers of former students choosing “public service” careers means more voters who will be enthusiastic about increasing the scope and size of government entitlements.

The official reason the federal government underwrites college student loans is to help students and the country’s economy. The reality is more sinister.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

Comments are closed.