Friday, June 28, 2013

Student Loans and Government Subsidies ... Government "Help" HURTS ... Another Example of the Law of Unintended Consequences

How much interest will be charged on outstanding student loans is getting lots of attention in Washington these days?

Why don't they talk about the principal instead? That's the real problem. That and government indirectly subsidizing the high cost of college through one billion dollars of outstanding student loans. The plain fact is that many of these loans won't be repaid because the 'student' won't be getting a good job and perhaps won't even complete the necessary academic work to earn a degree.

But even for the student who does graduate with a non-basket weaving degree which can help him get a good job, why does that degree cost the student so much? And the taxpayer, too.

Well, in large part it's because of the government "help" that in fact hurts the unsuspecting student.

And it's the same government gang that's going to keep interest rates on student loans low (after a politically charged hiatus for a week or so until declaring victory in mid-July). Meanwhile, the principal amount of those loans will continue to increase so colleges can charge more for tuition, grant more student loans and use the money to pay its administrators and teachers more.

The conspiracy of government "assistance" and our institutions of higher learning is real. What a travesty!

What's Really 'Immoral' About Student Loans is subtitled 'It's not so much the interest rates charged. It is, rather, the principal of the thing.':

"Unless Congress acts, interest rates for government subsidized student loans will double to 6.8% from 3.4% on July 1. In May, House Republicans passed a bill that would index rates on new loans to the rate on 10-year Treasurys (currently about 2.6%), plus 2.5 percentage points, with an 8.5% cap.

But with little Democratic support in the Senate, that bill is dead in the water.

Most Democrats want to lock the current 3.4% rate in place for two more years while Congress debates a "fairer" solution. Massachusetts Sen. Elizabeth Warren has even proposed letting students borrow directly from the government at the same ultra-low rate that banks currently get on short-term loans from the Federal Reserve—0.75%. She calls the Republican proposal "immoral."

In the student-loan world, there's immorality to spare—not in the still historically low interest rates, but in the principal of the thing. Student debt, which recently surpassed the trillion-dollar level in the U.S., is now a major burden on graduates, a burden that is often not offset by increased earnings from a college degree in say, race and gender issues, rather than engineering.
According to an extensive 2012 analysis by the Associated Press of college graduates 25 and younger, 50% are either unemployed or in jobs that don't require a college degree. Then there are the large numbers who don't graduate at all. According to the National Student Clearinghouse Research Center, more than 40% of full-time students at four-year institutions fail to graduate within six years. The National Center for Education Statistics reports that almost 75% of community-college students fail to graduate within three years. Those students don't have degrees, but they often still have debt.

Why do students have so much debt? According to a recent study by Mark Perry, a professor of economics and finance at the University of Michigan at Flint, between 1978 and 2011 college tuition in the U.S. increased at an annual rate of 7.45%, vastly exceeding the rate of inflation and the almost-stagnant rate of growth in family incomes.

The difference has been made up by more and more debt. . . . A study released last month by Fidelity Investments found that 70% of the class of 2013 is graduating with college-related debt—averaging $35,200. . . .

Now here's where the real immorality kicks in. The skyrocketing cost of a college education is a classic unintended consequence of government intervention. Colleges have responded to the availability of easy federal money by doing what subsidized industries generally do: Raising prices to capture the subsidy. Sold as a tool to help students cope with rising college costs, student loans have instead been a major contributor to the problem.

In truth, America's student loan problem won't be solved by low interest rates—for many students, the debt would be crippling even if the interest rate were zero.

If we want to solve the very real problem of excessive student-loan debt, college costs need to be brought under control. A 2010 study . . . found that many American universities now have more salaried administrators than teaching faculty.

Another way to approach costs is to remove the incentives for universities to accept government-subsidized student-loan money regardless of a student's prospects of graduation or gainful employment. Under the current setup, incentives run the other way: Schools get their money up front via student loans; if students are unable to pay the loans back, the burden falls on taxpayers (if the loan was "guaranteed" by the federal government), and the students themselves, while the schools get off scot-free.

A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. . . .

You can bet that under this kind of a rule, universities would be much more careful about encouraging students to take on significant debt unless they are fully committed first to graduating, and second to a realistic career path that would enable them to service that debt over time. At the very least, schools would be more likely to warn students of the risks.

Even thinking about the impact of such a "skin in the game" rule for colleges helps to illustrate the irresponsible—even, in Elizabeth Warren's words, "immoral"—way that colleges up to now have dealt with costs and with debt. If lawmakers were serious about helping students pay for college, Congress would be considering more than simply continuing low interest rates on ever-higher student-loan balances."

Summing Up

Government screws up again, and We the People suffer. But most of all, our young people suffer and America's economic strength deteriorates. Our system of education is broken, and future Americans will pay the price for all this "government help." 

The student loan fiasco is another great example of "we're from the government and we're here to help" welfare mentality that pervades America today.

But those we're trying to help aren't the students. Those we're helping are the college administrators and teachers. And their political allies in Washington, of course.

Meanwhile, the students, the taxpayers and the economy suffer.

That's my take.

Thanks. Bob.

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