By Richard Vedder
The moment I was the maddest during my soon-to-end service on the Secretary of Education's Commission on the Future of Higher Education was the day before the vote on the report, when a statement was taken out of the draft praising the private student loan industry and suggesting that its growth freed up federal resources for other uses. The sentence had been put in orginally by chairman Charles Miller, and I considered it a welcome and important addition to the report, but Charles withdrew it because of some flak he was getting, primarily from some student activists. I seriously considered voting against the report (as indicated in an earlier blog) based on this unprincipled retreat, and this prompted Charles Miller to come and urge me to support the report at my American Enterprise Institute office.
I felt then, and I do now, that Charles orginally had it exactly right. I would go further: I can find no intellectual justification for the federal government subsidizing relatively affluent kids who want to go to college, in part for consumption purposes (have the good life before entering the world of work), and in part to raise their incomes. Businesses wanting to make profits through investments borrow through private lenders for the most part, and so should students.
One of history's ironies and better examples of the law of unintended consequences is the fact that the growth of federal student loan programs coincides with a slowdown in the growth in student college participation.
I am reminded of all of this today when I read in Inside Higher Ed that the National Student Association has filed a complaint with the Federal Trade Commission over the practices of Loan to Learn, a program of EduCap, Inc. This company was founded by my fellow commissioner Catherine Reynolds. Without government subsidies (indeed, I assume it pays federal taxes), this company has filled a financing need, and has grown rapidly in recent years, as finally a small amount of sanity has led to some caps on federal student loan expansion. The NSA argues that sometimes Loan to Learn charges high interest rates. So what? If you don't like the company, borrow elsewhere. That is what competition is all about.
While I know nothing about the practices of this firm specifically, I think we should be grateful to entrepreneurs like Catherine who stepped up to the plate. To be sure, she made a bundle, in keeping with Adam Smith's magisterial injunction of 230 years ago, when he talked about people that "intends only his own gain, and he is in this... led by an invisible hand to promote an end which was no part of his inteniton." The purusit of profit serves a desirable social as well as private end.
I hear that Catherine may be getting back in the student loan game after a brief retirement. As a taxpayer, I am glad to have people like Catherine and her competitors provide lending services that appropriately should be handled by free enterprise, not by government bureaucrats and politicans.