Monday, June 01, 2009

Bad News for American College Students

By Richard Vedder

When I was admitted to college a half a century ago, most students did not borrow money from outside the family, despite the fact that people in those days had less than one-half the income, on average, that they do today. Student loans and Pell Grants came in, and colleges became more expensive and more elitist. While enrollments rose, they rose at a slower rate than before and slower than it otherwise would have. Federal involvement in financing has made college more costly and, probably, more elitist, as the gap in probabilities of graduating from college between the rich and poor have actually grown over time. This was part of my testimony before Congress (House Education and Labor Committee, George Miller, proprietor) a couple of weeks ago. I was the most provocative witness, but also the most ignored. Shame.

But my real complaint then and now deals with the current student loan program. It is a mess, is excessively complicated, etc. But there is competition in that students can borrow federally sanctioned (subsidized) loans from a variety of borrowers. The Obama Administration, with their socialist/communistic orientation, wants to end private lending, ostensibly in the name of efficiency. They claim great savings will come from doing this, funding a big Pell Grant expansion.

I suggested the savings are illusions, for which I was attacked by arguably the brightest of the Democrats on the committee, Rob Andrews of New Jersey. I will argue the following is almost certainly true:

1. More choice is preferred to less choice by nearly every American other than President Obama and some of the Obamanistas who surround him like Bob Shireman. Private providers have given students services --namely private attention--that no government monopoly provider gives. Service at the Bureau of Motor Vehicles, Post Office or Social Security Administration is less friendly and fast than at the private insurer insuring our cars, at Fed Ex or UPS, or at private providers of pension instruments. The same would apply to student loans.

2. CBO estimates of savings ignore or understate administrative costs of government programs relevant to the calculation of savings.

3. CBO ignores the federal income taxes paid by private lenders in their calculations of net budgetary effects. The Obamanistas cannot have it both ways --claims private lenders are reaping obscene profits off the loan program (by the way, they are not), and then ignore those profits when it comes to calculating budget effects.

There are other points, but enough is enough. The CCAP position is that the feds should get out of the college loan business. The Obama position is the opposite. We will see if the changes proposed do anything to make college more affordable, dramatically increase access and graduation rates for the poor, etc. Time will tell.


Jane S. Shaw said...

Rich, Jenna Robinson's new column at points out that the old loan system is pretty bad, too. It encourages students to borrow more than they need; it doesn't charge them a thing while they are in school (which may explain why Ph.D. candidates take 10 years to complete their degrees); and it offers all kinds of extended payment plans, which pile up interest rates. She argues that most students would be better off with far less debt, whatever the source.

capeman said...

"encourages students to borrow more than they need"

Mirrors the entire system on which the American economy is based -- compulsive consumerism, credit card debt, big houses, mortgages, ruinous debt.

So the colleges are doing a great job preparing students for life in America!