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Stop the student loan madness

There’s an article in todays Wall Street Journal, “Student Loans Take Political Stage”, regarding some of John Kerry’s proposals with respect to student loan programs.

Almost half of all college students borrow tuition money from the federal government's student-loan program. That's why two ideas to change it suddenly are making political waves.

Sen. John Kerry, the presumed Democratic presidential nominee, is talking about trimming the role banks play in the student-loan program, and using the savings that would result to fund public-service jobs, an idea he took to attentive audiences on a campus tour last month. At the same time, House Republicans, the White House and some Democrats are talking about making recent graduates pay more in interest as a way to ensure there's enough money for current students to borrow.

All that is making political fodder out of a 39-year-old federal entitlement that has helped put about 50 million people through college, and now has a powerful constituency. Last year, 6.2 million students attended college on federal student loans, which are the government's major vehicle for helping families pay for college and account for almost half of all student aid. Any student is entitled to a loan, and for low-income families, the government defers interest on that loan while the student is still in school.

First of all, let me point out that I am totally opposed to some kind of new program to “fund public-service jobs.” This is typical liberal thinking, always trying to find new and unnecessary ways to spend the taxpayer’s money.

And regarding whether or not banks that participate in the student loan program are ripping off the taxpayer, it’s probably true. Most government programs create new ways for the taxpayer to be ripped off. In the case of student loans, banks get to loan money at a good interest rate, and with no risk to the bank because the loans are guaranteed by the federal government. There was an in-depth article about this in one of the weekly news magazines a few months ago.

But what I wish is that our politicians would have the courage to re-examine whether we need student loans at all. Student loans are based on two assumptions which are not proven: (1) the more people who go to college the better; and (2) student loans make college more affordable.

It’s undisputed that people with college degrees, on average, earn more money than people without college degrees. But that doesn’t mean that college has made its graduate’s more productive workers. It more likely means that (1) those who are destined to be more productive workers (because they have achieved previous academic success, and are ambitious) are more likely to graduate from college; and/or (2) businesses prefer to hire college graduates because they value the credential, not because college makes people better workers.

College graduates today are, for the most part, taking jobs that in previous generations would not have required a college degree. But the college graduate is burdened with paying back the money he borrowed to attend college. Thus the college graduate today is not better off than his non-graduate peer from previous generations, he is worse off. The student loan program is not creating opportunities for young people, it is limiting their opportunities, and forcing them to start their lives already in debt.

Our government, instead of encouraging thrift, is encouraging people to be spendthrifts.

Furthermore, it seems to me that student loans are not making college more affordable at all. The cost of college tuition has been rising faster than the rate of inflation for many years. By providing additional funding to students in the form of student loans, it increases the amount of money they can afford to pay, thus giving colleges the leverage to raise their tuition. If student loans did not exist, colleges would be forced to either reduce their tuition, or to lend their own money to students. Although I’m opposed to students being forced to start out life in debt, at least under a private funding scheme, the most marginal students and marginal education programs wouldn’t receive funding.

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After writing the above post, I discovered that I wrote something very similar a few months ago, Student loan rip-off. It looks like I've now reached the stage of blogging where I am just repeating myself.

posted Monday, May 03, 2004

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