Wall Street Occupiers who are clamoring for a free college education, take heart. President Obama is rolling out steps to alleviate the debt burdens from student loans. On Oct. 26, the president announced his plan at the University of Colorado in Denver. There, euphoric students readily welcomed the news.

Two provisions in plan

The plan contains two basic provisions. First, students will be able to cap their loan payments at 10 percent of their discretionary income and have their remaining debt forgiven after 20 years. Currently, student loan payments can be capped at 15 percent of discretionary income and receive loan forgiveness after 25 years.

Second, students with federal loans from the Direct Loan and the Federal Family Education Loan programs are eligible for an interest rate reduction if they consolidate those loans. Funds for Direct Loans come directly from the U.S. Treasury, while Federal Family Education Loans dole out federally-backed money through private lenders. Because of new student loan laws written into Obama Care, Federal Family Education Loans are being discontinued — what do laws for student loans have to do with laws for health care anyway?

That confusion aside, the plan appears attractive, although it only offers students a quantum of relief from debt burdens. Perhaps it is appropriate now to consider the numerous costs and the flimsy basis on which politicians argue for more federal student aid in their never-ending quest to garner votes from those they indulge.

Federal aid contributes to rising tuition

The Obama administration’s new plan is a part of larger efforts intended to make college more affordable. Such federal intervention, unfortunately, has generated the opposite effect.

According to another Chimes article, increasing federal aid has driven up tuition prices as colleges try to seize as much of that money as possible. Instead of trying to reduce student costs, colleges often spend the subsidies on more administrators, student amenities or other goodies that have questionable educational worth. Former Harvard president Derek Bok once remarked, “Universities share one characteristic with compulsive gamblers and exiled royalty, there is never enough money to satisfy their desires.”

Value of a college degree

Federal efforts to lower college costs are also fueled by a misguided notion that a four-year degree is a necessary and sufficient condition for access to a lucrative career. Never mind that the late Steve Jobs and his rival Bill Gates are two of the many examples of people who did not complete college. And never mind the recent Center for College Affordability and Productivity study finding that over one third of college graduates have jobs that do not require a four-year degree.

Such trends began even before the current economic downturn, so it is not simply a consequence of today’s job market. Despite a large increase in the number of college graduates between 1992 and 2008, the same study found that 60 percent of graduates in that increase are underemployed.

Many employers require a four-year college degree for job applications, even for jobs that do not require a college education. Yet this is not necessarily because college graduates are better-equipped than someone who, say, receives on-the-job training or attends a specialized program that develops a particular skill. If anything, four-year degrees are so ubiquitous that employers may not bother to consider someone without one.

Consequently, some students could have prepared for a career by spending their time and money on something other than a traditional college program. This is one reason why, earlier this year, a Harvard report proposed alternate career paths.

Easy money yields other unintended consequences

Thus, increasing access to student loans in order to increase access to college may not be prudent. Furthermore, students unprepared for college and who would otherwise not attend may be incentivized to matriculate because federal aid may be low-risk and easily obtainable. Indeed, Obama’s new plan takes student loans toward this direction.

The situation will only worsen if this student ends up dropping out because he cannot handle the workload, lacks enough motivation or cannot formulate his post-college goals. Not only has this student lost time and resources, but he also has to repay a loan with little to show for taking it out in the first place. This outcome is not far-fetched; it is a problem for Austria, which offers all its students a free college education. Notably, the Austrian system is also one in which the poorer, who typically do not attend college, subsidize the college education of the richer.

Of course, Obama’s new federal aid plan shows favoritism to students but does not consider the taxpayer who provides the funds for the loans. Nor does the plan consider how it may adversely slow economic recovery.

Some may argue that by alleviating the debt burden, students will have money to spend on businesses in order to stimulate economic growth. However, this argument fails to take note that increasing government spending and liabilities restricts money supply, making it more expensive to borrow money and driving up interest rates. Possible inflation may devalue the dollar, or the possibility of increased taxes may cause consumers to reduce consumption. More importantly, this vicious cycle makes it difficult for businesses to invest. So much for economic recovery.

Obama’s new student loan plan sounds appealing, but caveat emptor. There are plenty of reasons to be wary about additional federal tinkering of student financial aid, not to mention alternative solutions that do not require Uncle Sam. Until people recognize and think through these reasons, politicians will continue to have their way in order to gain votes and leave everyone else with adverse unintended consequences. And that’s not good for college students either.