Student loans: Exploiting America's young - Douglas Holtz-Eakin

(Reuters) - Obamacare was paid for on the backs of students.

You may remember that Obamacare staggered over the legislative finish line in 2010 with $19 billion in profits from changes to the student loan program. The changes included nationalizing federal student lending and setting loan interest rates high enough to generate profits to cover the healthcare costs.

Monday, President Barack Obama and the Democratic-led Senate again put their political and legislative priorities ahead of students and allowed their loan interest rates to double.

This student loan episode cements the Obama administration's continuing pattern of economically exploiting younger voters.

Because of the Obamacare-created Federal Direct Lending Program, a 2009 freshman who qualified for federal subsidies and borrowed the maximum Stafford Loan every year will graduate with a financial penalty of over $400 more in debt than if markets had set interest rates. A more affluent freshman, who did not qualify for subsidies, will carry an additional $1,400 in debt. Meanwhile, a graduate student, who entered a three-year program in 2009, will be facing nearly $3,400 more in debt as he or she seeks to launch a career.

In passing Obamacare, Washington took its eye off the economic recovery. As a result, the unemployment rate for workers aged 20 to 24 remains stubbornly above 13 percent; the rate for those ages 25 to 34 is more than 7.0 percent, and the duration of unemployment remains at levels not seen since the Great Depression.

The House of Representatives recently passed a bill shifting student loans back to market-based interest rates. The advantages of this approach are so evident that even President Barack Obama advocated it in his budget proposals. Kudos to the White House for recognizing that price-fixing is never a good idea.

The House bill reduces current rates for all college borrowers and saves students up to $1,413. At the same time, it reduces the drain on taxpayers by roughly $4 billion over the next decade. It also insulates the program from the machinations of bureaucrats setting arbitrary rates.

Sounds all good.

Unfortunately, the Senate failed to act — preferring the status quo. They are willing to kick the can down the road for another couple of years. As Senator Tom Harkin (D-Iowa), the chairman of the Senate Health, Education, Labor and Pensions Committee, stated "Let's put this off for a year."

The White House failed to lead, changed positions from its budget-proposal outline and caved to the Senate, embracing its central planning approach. This after the House passed a solution in line with the president's own budget, and some Senate Democrats expressed support for this solution.

The resulting stalemate means that interest rates will now be fixed at 6.8 percent. This may be good politics for some. But there is one clear loser: students.

Let's hope that the young find jobs soon. After all, they're now expected to pick up yet another tab. Federal debt has exploded since 2009 and is projected to nearly double to $19 trillion in another 10 years.

It used to be said that federal debt was a problem for future generations. But no longer. The interest alone will amount to the kind of money spent by a federal agency as large as the Pentagon in 10 years. Unless young Americans actively control the debt over the next two decades, the economic damage will be incalculable.

It is a bleak picture and at odds with the administration's popularity with young voters. Perhaps the bloom is finally off the rose.

The same Obamacare that resulted in higher loan rates for students is built on a foundation in which young Americans are forced into insurance pools that subsidize the coverage of the older and sicker. To do so, it will likely raise the health premiums of young Americans dramatically. As health insurance premiums rise, fewer will buy insurance. Indeed, if the premium increase shock is an all-too-plausible 30 percent hike, 45 percent may just pay the tax penalty and stay out of the insurance pool.

In light of this pattern of economic abuse, the intransigence of Senate Democrats on a permanent fix to the interest costs on student loans is not surprising. But it is no less costly to young Americans.

(Douglas Holtz-Eakin is a Reuters columnist but his opinions are his own.)

(Douglas Holtz-Eakin served as director of the Congressional Budget Office, 2003-2005, and chief economist of the Council of Economic Advisers for President George W. Bush, 2001-2002. He is now the president of the American Action Forum, a center-right think tank, and was a commissioner on the Financial Crisis Inquiry Commission.)

(Douglas Holtz-Eakin)