Reforming Federal Student Loan Programs

By Richard Vedder

The federal student loan scandal has aroused anger on the part of everyone, excepting of course the universities themselves, who rarely can bring themselves to admit that they have done something wrong. We have a morally dubious cesspool of problems. I have a great solution to the federal student loan problem: get rid of them. The federal government should go to one single assistance program (other than the GI Bill): an expanded Pell Grant system that is administered as a voucher given to individual students, not to the institutions. Private loan companies then can make all the loans they want to students, and charge whatever interest rates they want -- without special government regulation or involvement. They should probably be forbidden from making those loans via student financial aid offices at colleges, since colleges use financial information routinely to modify their own scholarship decisions relative to students.

Make the vouchers a fixed amount for all, or make them progressive depending on student income, but do not vary the voucher with the school that the student attends. The government should help all students in need attend Basic Quality U, a good but not necessarily distinguished institution. It is not the federal government's job to send poor kids to expensive schools, many of them increasingly country club-like in their orientation. Poor kids who do extremely well at Average State U will receive fellowships and other aid for advanced degrees, increasingly the key to big time financial success.

If we gave 8 million of these vouchers out in amounts averaging $5,000, (vastly more than the number or size of Pell Grants given now), and allow them to go to families with, say, incomes of less than $75,000 a year (somewhat above the national median), we would be giving major help to poor and even many middle class Americans going to college. The $40 million cost would not break the federal government's budget if we eliminate other programs. Persons with incomes above that should be forced to pay for them on their own, or get scholarships based on academic excellence (I believe merit based scholarships are not heinous in principle). If families want their kids to go to Yuppie U, or if they want to maintain their present life style while sending their kid to college, then the kid (or parents, or both) can go to the bank and borrow, just as they might for a car.

I would allow colleges to give out their own institutional aid if they choose, but I would forbid them from asking students about their finances or other aid received. I would ABOLISH the FAFSA form in its current use, having a short form on family income (and not wealth) used by the federal government for determining the size of Pell vouchers, with it illegal for colleges to require that form in their own determination of financial aid. Student financial aid offices would become scholarship offices of modest size, perhaps even disappearing at some schools that give little or no institutional scholarship aid. Schools themselves could make loan programs using their endowment, or even equity-based programs where kids sold some of their human capital to the school (the amount of student repayment of funds becomes dependent on student vocational success). At Harvard, providing average loans or equity investments of $50,000 to 50,000 present or former students would absorb well under 10 percent of the institution's obscenely large endowment.

This system would solve all sorts of problems. The whole student loan scandal would eventually go away. Vouchers could be increased by the rate of inflation, ending the current inflationary spiral where colleges raise tuition fees a lot and student loans follow with ever larger loans. It would help put a break on increasing tuition charges. The disincentive effects on national saving of the current system (if you save for college, your college aid declines) would mostly be eliminated. Students would be empowered more in choosing schools, increasing price competition and attention paid to undergraduates. It is a marvelous idea, a way of moving away from the bureaucratization of higher ed and ending the increasing corruption.

Yet it does not have a snowball's chance in hell of succeeding. Why? Two reasons. Teddy Kennedy and George Miller (chairs of the congressional education committees) love government, and want governments providing aid --an extension of the welfare state they love so much. The same is true of many others in Congress. This problem canbe overcome, however, if the expanded Pell Grant program is large enough. A bigger issue is that student loan interests will drop literally tens of millions of dollars over Congressional offices to stop this -- they will engage in the subtle form of bribery that has so poisoned the public policy arena in America today.

The late great Milton Friedman proposed vouchers over 50 years ago, and they are starting to have some impact in K-12 education despite powerful union opposition. Perhaps if we stick to our principles we can effect change at the collegiate level in even fewer years -- although probably not overnight.