Thursday, August 13, 2009

McCluskey on SAFRA

by Daniel L. Bennett

CATO's Neal McCluskey has an OpEd in Forbes this week discussing the eminent problem of the SAFRA bill that is making its way through Congress relatively unscathed. McCluskey points out:
SAFRA's major problem isn't that it would kill guaranteed lending. It's that it would replace it with federal direct lending--which currently amounts to about a quarter of FFEL's size--and completely cut out private capital markets, making Uncle Sam your sole choice of lender. With the government acting as lender, there is no reason for economic realities to constrain student loans.
Something that Mr. McCluskey didn't mention in his piece, but perhaps should have is the evidence of the role that government student loans have played in contributing to the arms race in academic spending, leading to higher tuition.

This has harmed those in the lower income ranks the most --whose ability to pay is constrained by financial aid. With ever-rising tuition, these students increasingly rely on student loans that generate piles of debt. While such students arguably increase their earnings power through "credentialing", amassing exorbitant amounts of debt to the federal government is no way to jump social strata. This reduces the chance of enterprising young graduates taking the risk to start their own businesses, as the reality of paying back their loans often creates a constraint on a student's dreams --taking backseat to a job that will pay the bills.


Neal McCluskey said...

Daniel, you're certainly right about the inflationary effect of student loans (and aid generally) on tuition, and I've dealt with that on many previous occasions. My main concern this time around, though, wasn't the effect of aid, but the highly questionable assertion that SAFRA will ultimately save taxpayers money. Since I wrote the piece, more has come out on that, and it seems I was right to be skeptical. I cover that new evidence at

capeman said...

It's amusing to hear people who take advantage of public higher education, with its state subsidies, and perhaps public financial aid -- guaranteed loans? Pell? GI Bill? -- usually at public research universities -- and then go on with their degrees to bash subsidies for public universities, to advocate for-profit schools, online degrees, advocate against research at universities.

Here where I work, the state has just slashed higher education again. Tuition has been raised, a lot, in response. Duh!

If the students really don't want to go into debt -- about half of them do and the median debt at graduation is around $20,000, which will just about pay for around 7% of a typical local house, or get them started with, say, a hot dog stand -- if they really don't want that, they can try other measures. Full-time summer work at minimum wage plus about 13 hours per week during school (with breaks) will pay the in-state tuition. Assuming they don't get any scholarship. (The increased tuition largely goes to pay for increased scholarship aid to the truly low-income students.)

Or, they can go to a community college the first two years, with the disadvantages and advantages that entails.

If some students really would rather start a business (especially in the great economic climate today), really just want a credential, you know what? I say let them! Better for everyone.

But you know, most of the students are not a bunch of libertarian whiners who milk the system and then complain about how they've been ripped off.