Obama's $22 Billion Student Loan Bailout Will Only Get Bigger

Conn Carroll
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Posted: Feb 06, 2015 11:30 AM
Obama's $22 Billion Student Loan Bailout Will Only Get Bigger

Less than a week after the Congressional Budget Office confirmed that President Obama's executive amnesty will cost taxpayers $10.2 billion in tax creditsPolitico is now reporting that Obama's executive student loan bailout will cost taxpayers another $22 billion.

Tucked into Obama's fiscal year 2016 budget, Politico found that thanks to the executive actions taken unilaterally by Obama this summer, the Department of Education's student loan program posted a $21.8 billion deficit last year and that number could go up substantially next year: 

The 40 million Americans with student loans are now saddled with more than $1.2 trillion in outstanding debt. And with higher education costs rising much faster than inflation, the already massive program has been growing at a spectacular clip; direct government loans alone increased 44 percent over the last two years despite an aura of austerity in Washington. The Obama administration has tried to ease the burden for some borrowers by reducing their payments to 10 percent of their income and forgiving their loans after 20 years; this year, the Education Department plans to make all borrowers eligible for that “pay-as-you-earn” relief.

Student loan defaults increased somewhat last year, but the department says the primary drivers of the unprecedented “re-estimate”—budget-wonk jargon for the update of expected loan costs—were Obama’s policy changes, the recent ones as well as the upcoming ones. And because of a quirk in the budget process for credit programs, the department can add the $21.8 billion to the deficit automatically, without seeking appropriations or even approval from Congress.
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It’s not yet clear whether this will be a hefty one-time revision, or a harbinger of oceans of red ink as millions more borrowers get relief on their payments to the government. Several reports by Barclays Capital have warned that Obama’s generosity to borrowers could leave the student loan program as much as $250 billion in the hole over the next decade. And behind closed doors, officials in the White House budget office and the Treasury Department have criticized the Education Department’s loan models as overly optimistic, with some officials pushing internally for third-party audits.

American Enterprise Institute higher education expert Andrew Kelly tells Townhall that taxpayers should not be surprised by the red ink caused by Obama's rewrite of federal higher education law. "The news that existing income-based repayment programs have dramatically raised the cost of federal student loan programs should not surprise anybody," Kelly said. "The programs provide extremely generous benefits to borrowers in the form of loan forgiveness but do nothing to ensure that students have incentive to invest in affordable, effective programs on the front end. These benefits also provide colleges with even less incentive to keep their tuition low and leave taxpayers footing the bill for increasingly expensive degrees that may or may not have any value."

And that $250 billion estimate for the cost of Obama's student loan bailout is probably on the low-end. With borrowing costs effectively capped by Obama, students will now be able to pursue more expensive degrees and stay in school longer. Universities will also be able to charge higher tuition prices knowing that taxpayers will end up footing the bill.

Considering that Republicans in Congress seem determined to cave to Obama on his executive amnesty, and the billions in tax credits it will cost taxpayers, there is no reason to believe Republicans will do anything to stop Obama's costly student loan bailout either.