Trump Administration Limits Predatory Lending in Education

President Trump is implementing a ban on students pursuing certain degrees from taking out college loans, although it is important to note that no student is explicitly prohibited from any major. Undergraduate programs must demonstrate that their graduates earn more than the typical high school diploma holder, while graduate programs must prove that their graduates earn more than the typical bachelor’s degree holder.

This new lending rule is considered relatively lenient, with the comparison group for undergraduate programs being working adults aged 25-34 with only a high school diploma. For graduate programs, the bar is set at the lowest of several bachelor’s benchmarks, including those in the same field. A master's in social work, for example, must only outperform individuals with a bachelor's degree in social work.

A program must also fail in two out of three years before it loses eligibility for loans. The Department estimates that around 5% of programs will fail during the first year. Critics argue that this new rule is a form of "predatory lending," as the actual borrower is not the individual student but rather the taxpayer, who is forced to act as a co-signer.

Most expansions of the student loan program have been driven by the idea of providing assistance to students who lack the financial means to afford college. However, the real issue lies in the fact that the government's involvement in student loans has led to the creation of programs with poor outcomes, resulting in high default rates and poor repayment.

Economists warn that such programs fail to serve as investments or insurance against bad luck, as they primarily benefit programs whose graduates are unlikely to repay their loans. The article points to a study by Looney and Yannelis, which highlights how policymakers weakened regulations in the late 1990s, leading to the enrollment of relatively disadvantaged students in poor-performing, low-value institutions.

These institutions struggled to complete degrees, faced high default rates, and found themselves in challenging job markets. Consequently, the federal program's finances deteriorated as these borrowers accumulated loans with poor repayment prospects. The article argues that the biggest subsidies are given to programs with graduates who are least able to repay, rather than those with strong public support cases.

As a result, taxpayers end up subsidizing degrees with little positive impact, such as those in music, drama, and masseuses, while industries with more promising futures receive little support.