The Student Loan Scandal: A Disaster or an Opportunity?

By Richard Vedder

The more I think about it, I think the student loan scandal is a positive development for higher education, with one huge caveat. Universities, their financial aid officers and/or lenders have been exposed in sweetheart deals, for taking or giving overt bribes, and for misinforming consumers. While that is bad, it reveals to the public that universities are not saintly institutions, free from sin and human frailties. That is good. And it is good that people are increasingly critical about the providers of higher education services. The universities have largely been viewed as sacrosanct, not subject to criticism, and that has deterred meaningful reform.

When billions of dollars of loan money is sloshing around, it is inevitable that individuals will try to get their hands on some of it --by legal or illegal means. When student financial aid offices have full information on the economic status of the customer (via FAFSA financial disclosure forms), as well as control or influence over the funds available to meet student needs, they have the means to make decisions often not in the student's best interest.

The House of Representatives overwhelmingly passed a bill that tries to deal with the problems of kickbacks to colleges and college officials from loan providers. The Senate will approve it also. It is an understandable response to a problem, and might do some good. But I am not sure the best solution is government regulation. A better solution is to restructure financial aid. Perhaps the provision of education services needs to be separated from the financing of them. Maybe the federal government would be best served providing cash assistance to the poor for whom college access is truly problematic for financial reasons, done by giving students (not institutions) vouchers good to cover part (but not all) of tuition charges. Call it an expansion and modification of the Pell Grant program if that is what sells it. Beyond that, the government should exit the student financial assistance business, leaving it up to individuals, charitable organizations, private lenders, and, perhaps, state governments to fill the gap. Financial aid offices would largely disappear, except to dispense institutional provided aid (tuition discounts) and also lists of private providers of loans. The current loan system, as constituted, is a key factor in the tuition fee explosion, as colleges can charge whatever the traffic will bear, and the customers simply borrow whatever it takes to pay the bills. If you want to slow the tuition fee rise, you need to reduce the rate of growth of federal subsidized assistance.