EDITORIAL: U.S. taxpayers face multibillion-dollar liability to cover student loan defaults

When it comes to public policy, health care, tax reform and immigration have dominated the debate during Donald Trump’s first year in office — with mixed results for the president.

In the months ahead, federal infrastructure spending is likely to garner plenty of attention.

But lurking outside the headlines is a looming fiscal train wreck that demands attention from Congress and the president: the student loan crisis.

Last Friday, the Department of Education released a report indicating that millions of student loan recipients are enrolled in a debt-forgiveness program that threatens to cost the taxpayers billions of dollars. The review concludes that almost 40 percent of borrowers who entered college in 2004 are likely to walk away from their obligations.

The fiasco is the result of a program signed into law by George W. Bush in 2007, and the Obama administration’s subsequent decision to punish evil bankers by essentially nationalizing the student loan industry. The takeover was supposed to result in substantial profits for the government and lower interest rates for students. Oops.

Turns out that the feds now have a $1.4 trillion student loan portfolio, but defaults keep climbing. In addition, many loan agreements wipe out any outstanding balance once the borrower has made payments for 10 or 20 years.

Is it any wonder that the country is on a fast track to insolvency? Imagine if a mortgage lender did the same.

As a result, “money coming in for government student loan and guarantee programs will be $36 billion short of what’s needed to cover outstanding debt and accrued interest,” noted Wall Street Journal columnist Josh Mitchell this week. As a comparison, Mr. Mitchell notes that the federal government spent $33 billion to bail out Wall Street and the auto companies during the financial crisis.

To make matters worse, a 2016 report by the General Accounting Office found that education bureaucrats under Mr. Obama consistently understated the cost of forgiveness programs by billions of dollars.

Douglas Holtz-Eakin, a former head of the Congressional Budget Office, told Mr. Mitchell that he expects default rates to continue to rise, given current trends. “This is the financial downside of government-credit intervention, whether it’s direct loans or guarantees,” he said. “And it turns out these are large numbers.”

Who could have possibly predicted that a government program predicated on handing out billions of dollars to teenagers and young adults with little regard for credit history or their ability to make good on their debt would eventually boomerang on the taxpayers?

Mr. Mitchell notes that congressional Republicans have proposed a handful of reforms, including a modification of debt-forgiveness options and limits and how much individuals may borrow from the government. Both changes seem eminently sensible.

The time to act is now, before taxpayer liabilities balloon even further.

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