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The Biden Administration’s Ivy League Bailout

Posted: Apr 29, 2024

There are few terms in public finance quite so loaded as “bailout.” The term suggests taxpayers footing the bill for private actors’ mismanagement or malfeasance. Ask anyone with a memory that predates 2008 what a bailout is, and one is likely to hear a lamentation of Main Street bailing out Wall Street. The Troubled Asset Relief Program (TARP), long expired, was widely regarded as a massive taxpayer bailout of the very institutions that caused the financial crisis. 

All told, the TARP program cost the taxpayers $31.1 billion, a relative pittance in today’s terms, and was credited with contributing to stabilizing cratering financial markets. Indeed, the most reviled aspects of TARP – direct capital injections in large financial institutions – ultimately made the Treasury a profit of over $16 billion. The losses in TARP came from ever more creative interpretations of authority under the statute, which included additional disbursements to auto companies, housing assistance, and other measures.

For all the public’s revulsion of TARP, its cost to taxpayers pales in comparison to the Biden administration’s bailouts of specific constituencies we see today. The most egregious, but hardly the only example, is the administration’s serial attempts to make an end-run around the constitution and bail out certain student loan borrowers. 

As documented clearly by the House Budget Committee, the campaign to appease this particular slice of the American electorate began in earnest in August 2022, when the Biden administration announced it would unilaterally forgive $10,000 in student loan debt per borrower, among other policies, at an estimated cost of $430 billion. The administration reinterpreted a 2003 law focused on supporting members of the armed forces after 9/11 to justify the loan forgiveness program. About a year later, the Supreme Court deemed this policy unconstitutional

Undaunted, the Biden administration has pursued more creative legal strategies to defy the Supreme Court’s ruling. On the same day the Court closed the door on the administration’s first attempt at bailing out borrowers, it announced new rulemakings that would put taxpayers on the hook for $559 billion in student loan debt – $100 billion more than under the unconstitutional student loan forgiveness program.

Recall that the TARP program was designed to stabilize financial markets in the wake of the worst financial crisis since the Great Depression, and there are credible estimates of broad-based benefits in excess of its costs. 

Contrast TARP with the Biden administration’s student loan bailout. Multiple analyses have found that the benefits of the administration’s student loan policies skew heavily to highly educated, upper income households. Under the most recent initiative announced earlier this month, 750,000 households making over $312,000 would be eligible to have the U.S. taxpayer pick up some of the tab for their loans.

What benefits will accrue to society or higher education from this policy? Research has found that these policies encourage more indebtedness, as new borrowers expect debt relief, while colleges and universities continue to increase tuition rates. One study found that subsidizing student loan debt passed through to higher tuition, particularly for more expensive degree programs and private (read: pricier) institutions. 

Given how far adrift many of America’s institutions of higher education are today, the last thing taxpayers should be asked to do is bail them out