Massachusetts and the Student Loan Mess

By Richard Vedder

I made the mistake of ruining a nice weekend by reading Lila Gueteman's piece in the Chronicle of Higher Education which indicated Massachusetts Governor Deval Patrick is pressuring state institutions to help bail out the state's student lending agency, the Massachusetts Educational Finance Authority. The schools seem torn as to what to do. They don't want to annoy the governor, but they really do not want to drop money into the student loan rat hole.

Terry Hartle, of the American Council of Education, in his typical diplomatic and suave fashion, nicely said he thought it would be wise for the schools to avoid doing this, given the real potential conflict of interest issues that arise when colleges are involved on both sides of a transaction. They are telling students to get student loans --and then they have a financial interest in one of the major providers. Only last year, the New York Attorney General suggested such behavior was more than ethically dubious, it was illegal.

The whole thing is a monumental example of government irresponsibility and failure. The whole student loan problem arose as a consequence of overly expansionary Federal Reserve policies that fed a boom in real estate that led to all sorts of imprudent loans --that the bank regulators (including the Fed) did not try to stop. The contagion in the real estate lending market spread to student loans. Lenders had an epiphany: lending buckets of money to teen-agers with no credit or stable earnings history may not always be smart. Congress aggravated the problem by mandating smaller fees on student loans for private providers, leading to an exodus of private lenders from the market. State agencies suffered as loan defaults and a new inability to borrow has stifled them. In typical Massachusetts fashion, the Governor wants to deal with one government failure by having more government bailouts --this time an indirect government bailout financed by state universities.

The universities should nicely tell Governor Patrick to go to hell. In fact, I think universities should get completely, totally out of the student loan business --period. They are in the education business, not the finance business. The scandals associated with kickbacks, etc., to colleges and officials who deal with private lenders should have led heads to roll, but, being higher education, it did not to a big extent. No one suffers much from incompetence or error.

I was in a conversation about loans yesterday with some government bureaucrat types, and one said "we should not try to tell colleges how to spend their money." This was in the context of government funds provided universities to assist students. Colleges should have NONE of this type of money --period (I was so upset I simply hung up to avoid a huge blow up that might be health endangering to me). Government money belongs to the people who provide it, or, at least to the people for which it is intended, in this case students. We are worried about making institutions happy, not helping students.

Give poor kids super Pell grants in a voucher, and let the rest go to the bank like anyone else needing a loan --and stay away from this morass that diverts colleges from their real purposes and contributes to corruption and deceit, not to mention higher college tuition fees, a subject for another blog.