The federal government subsidizes some loans to college students. Typically, the more students who participate in these programs and the more they borrow, the higher the cost to the federal government. In 2011, President Barack Obama convinced Congress to pass these changes to the federal student loan programs:
(1) Payments were capped at 10 percent of a borrower's discretionary income;
(2) Any unpaid balances for people working for government or in the nonprofit sector were forgiven after 10 years; and
(3) People working in the private sector had their loans forgiven after 20 years.
a. As a result of these changes in the federal student loan program, would you predict that the total amount that students borrowed under these programs increased or decreased? Briefly explain.
b. As part of his 2016 federal budget proposals, President Obama recommended significant changes to the federal student loan programs. Given your answer to part (a), do you think President Obama was likely to have recommended changes that would increase or changes that would decrease the payments that borrowers would have to make? Briefly explain.
c. How might President Obama and his advisers have failed to correctly forecast the effects of the 2011 changes to the loan programs?