Archive for November 17th, 2011

November 17, 2011

A slam on the federal student loan program

by Grace

First there’s this.

We are borrowing from the Chinese to finance school attendance by a predominantly middle-class group of Americans.

We increase our deficit every time the feds make a loan.  Richard Vedder goes on to slam the Occupy Wall Street idea of forgiving of student loans.

“Why should we give a break to this particular group of individuals, who disproportionately come from prosperous families to begin with? Why give them assistance while those who have dutifully repaid their loans get none?”

Has the loan program achieved its goal of helping the poor?

In 1970, when federal student-loan and -grant programs were in their infancy, about 12 percent of college graduates came from the bottom one-fourth of the income distribution. While people from all social classes are more likely to go to college today, the poor haven’t gained nearly as much ground as the rich have: With the nation awash in nearly a trillion dollars in student-loan debt (more even than credit-card obligations), the proportion of bachelor’s-degree holders coming from the bottom one-fourth of the income distribution has fallen to around 7 percent.

Vedder spells out five “sins” of the federal loan program.

First, artificially low interest rates are set by the federal government — they are fixed by law rather than market forces. Low-interest-rate mortgage loans resulting from loose Fed policies and the government-sponsored enterprises Fannie Mae and Freddie Mac spurred the housing bubble that caused the 2008 financial crisis. Arguably, federal student financial assistance is creating a second bubble in higher education.

Second, loan terms are invariant, with students with poor prospects of graduating and getting good jobs often borrowing at the same interest rates as those with excellent prospects (e.g., electrical-engineering majors at MIT).

Third, the availability of cheap loans has almost certainly contributed to the tuition explosion — college prices are going up even more than health-care prices.

Fourth, at present the loans are made by a monopoly provider, the same one that gave us such similar inefficient and costly monopolistic behemoths as the U.S. Postal Service.

Fifth, the student-loan and associated Pell Grant programs spawned the notorious FAFSA form that requires families to reveal all sorts of financial information — information that colleges use to engage in ruthless price discrimination via tuition discounting, charging wildly different amounts to students depending on how much their parents can afford to pay. It’s a soak-the-rich scheme on steroids.

That fifth sin is one that never occurred to me, but of course those financial forms do provide the details that make possible the secretive price discounting that baffles and frustrates many families.

HT Instapundit

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