For the majority of students, who don't become very high earners, it will make little difference if loan amounts are $90,000, $180,000 or even more. As the repayment burden will be capped to a percentage of average income, loan repayments will be the same for any loan beyond a certain threshold.
These policies could remove all barriers for larger and larger loans, which will then allow universities to charge higher and higher tuitions. This will permit them to maintain their bloated administration infrastructures and will allow them to continue loading up their campuses with even fancier facilities such as gymnasiums, performing arts centers, food courts, and health centers. The day of reckoning in which the higher education system would have had to offer programs that fit into the budget of average Americans has been postponed, if not entirely eliminated.
Of course the losers in this new arrangement will be American taxpayers who will be on the hook for the unpaid balances. Recently, college loan debt passed credit card debt as the largest, non-mortgage, source of debt in the United States. The balance of these unpaid student loans will be thrown onto the pile of America's escalating unfunded debt. Of course, the moral hazard implicit in the program means these liabilities will now pile up even faster. In addition, the program substantially increases the interest rate risk to which taxpayers are already over-exposed due to the short maturities of the national debt. The higher student loan interest rates rise, the larger the unpaid balances that taxpayers will be forced to assume.
Obama's move is likely to set off a student loan forgiveness arms race in which politicians may continue to ease and cap loan repayment obligations. With nearly a trillion dollars of outstanding college debt rapidly increasing, debt forgiveness for the young could be the political equivalent of protecting social security for the elderly. If college students were willing to rack up this much debt under the assumption they would have to actually pay it back, imagine how much debt they will be willing to amass now that they realize they do not? As a result, expect college tuition increases to not only continue but to accelerate.
In a way, Obama would be turning higher education in to a third-party payer system (not too dissimilar from our current health care system - which is also characterized by outsized cost increases). Under this new system, colleges might charge whatever they want because their customers simply turn the bill over to the U.S. taxpayer who has no say in the transaction. Under such a system what incentive would a kid have to live at home and go to a community college? Why not attend the most expensive university that taxpayer money will allow? I suppose Obama was so impressed with how this dynamic works with health care that he decided education could use some of the same medicine.
Peter Schiff is president of Euro Pacific Capital and author of "How an Economy Grows and Why it Crashes."