A Better Approach to Student Loans

By Richard Vedder

Michael Dannenberg and Philip Longman (hereafter D and L) of the New America Foundation have an excellent opinion piece in today's Washington Post. Current federal policy fixes the remuneration of private businesses that fund and administer federal guaranteed student loan programs. Democrats argue, with some justification, that providers like Sallie Mae are earning monopoly profits from these programs, while Republicans argue that the Dem's ideas of sharply reducing allowable fees, etc., are likely to stifle student lending and it also interferes with market forces. I have lamented that the proposed 3.4 interest rate on student loans that Dems want to mandate is an inappropriate way of subsidizing students.

D and L say let markets determine what the conditions of student loans should be. Let us allow competitive bids for the right to engage in this business, with the lowest fee provider given preference. This would give students the best deal possible, improving access and making liberals happy, while conservatives would applaud the move away from government mandated pricing and towards a competitive market solution. D and L are absolutely right.

Longer term, I do not know why the federal government needs to be in the loan business at all. An expenditure neutral approach: the federal government completely gets out of the student lending business and allow markets to operate as they do for home equity and car loans, and, less perfectly (given government involvement) with home mortgages. Take the federal money spent on these loan programs and use it to expand Pell Grants significantly. And, finally, make Pell Grants portable gifts directly to students, not to institutions. You would have a system that would increase access by helping the truly poor, would increase efficiency and empower students, and increase competition for students in a healthy way. Let us “voucherize” higher education federal assistance, and get out of the federal loan business. D and L are proposing a nice first step towards that sensible solution.