Washington’s Quietest Disaster

This rising default rate doesn’t even tell the whole story. The government allows various “income contingent” and “income-based” repayment options, so the statistics don’t count kids who were given permission to pay less than they owed. Taxpayers shouldn’t expect relief any time soon. Thanks to policy changes in recent years and fraudulent government accounting, the pain could be excruciating.

Readers who followed the Congressional birth of ObamaCare in 2010 may recall that student lending was the other industry takeover that came along for the legislative ride. Private lenders used to originate federally guaranteed loans, but the new law required all such loans to come directly from the feds. Combined with earlier changes that discouraged private loans sold without a federal guarantee, the result is a market dominated by Washington.

The 2010 changes did not happen simply because President Obama and legislators like Rep. George Miller and Sen. Tom Harkin distrust profit-making enterprises. The student-loan takeover also advanced the mirage that ObamaCare would save money.

Thanks to only-in-Washington accounting, making the Department of Education the principal banker to America’s college students created a “savings” of $68 billion over 11 years, certified by the Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted that this estimate was bogus because CBO was forced to use federal rules that ignored the true cost of defaults. But Mr. Miller had earlier laid the groundwork for this fraud by killing amendments in the House that would have required honest accounting and an audit.

Armed in 2010 with their CBO-certified “savings,” Democrats decided they could finance a portion of ObamaCare, as well as an expansion of Pell grants. But as Bernie Madoff could have told them, frauds break down when enough people show up asking for their money. That’s happening already, judging by recent action in the Senate Appropriations Committee, where lawmakers apparently realize that the federal takeover isn’t going to deliver the promised riches.

To preserve Team Obama’s priority of maintaining a maximum Pell grant of $5,550 per year and doubling the total annual funding to $36 billion since President Obama took office, Democrats recently decided to make student-loan borrowers pay interest on their loans for their first six months out of college. Washington used to give the youngsters an interest-free grace period. Taxpayers might cheer this change if the money wasn’t simply being transferred to another form of education subsidy. But it seems almost certain to raise default rates as it puts recent grads under increased financial pressure.

None of these programs has anything to do with making it easier to afford college. Universities have been efficient in pocketing the subsidies by increasing tuition after every expansion of federal support. That’s why education is a rare industry where prices have risen even faster than health-care costs.

This is also the rare market where the recent trend of de-leveraging doesn’t apply. An August report from the Federal Reserve Bank of New York found that Americans cut their household debt from a peak of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion. Consumers have reduced their debt on houses, cars, credit cards and nearly everything except student loans, where debt has increased 25% in the three years.

Perhaps this is because most federal student loans are made without regard to income, assets or credit history. Much like the federal obsession to finance a home for every American regardless of ability to pay, the obsession to finance higher education for every high school student ignores inconvenient facts. These include the certainty that some of these kids will take jobs that don’t require college degrees and may not support timely repayment.

For this school year, even the loans that pay on time aren’t necessarily winners for the taxpayer. That’s because of a 2007 law that Mr. Miller and Nancy Pelosi pushed through Congress—and George W. Bush signed—that cut interest rates on many federally backed student loans. Stafford loans, the most common type, have been available since July at a fixed rate of 3.4%, barely above the historically low rates at which the Treasury is currently borrowing for the long term. The student loan rates are scheduled to rise back to 6.8% next year. But if our spendthrift government ends up borrowing money above 7% and lending it to kids at 6.8%, taxpayers will suffer even before the youngsters go delinquent.

Efforts to clean up this debacle are stirring on Capitol Hill, with House Republicans moving to limit Pell grants to students who have a high school diploma or GED. Oklahoma Sen. Tom Coburn would go further and have government leave the business of subsidizing the education industry via student loans and let private lenders finance college. That may be too radical at the moment, but it won’t be if taxpayers ever figure out how much subsidized loans will cost them.