A bipartisan group of senators has signed off on a compromise bill that will keep the interest rates on student loans from going up significantly this fall. The bill would tie the interest rates on college loans to those on U.S. Treasury bonds, an improvement to the extent that it links the cost of borrowing to something other than political expediency, but undesirable in that it keeps Congress actively engaged in the college-loan racket.
And a racket it is. The cost of college at both the undergraduate and the graduate levels has climbed far faster than the rate of inflation for years, and subsidized student loans are a significant part of the reason for that. The main effect of student loans is not to help more young people to go to college but to help college administrators pay themselves more — the students are only a pass-through for federal money. While the interest rates are nominally low, the amount that has to be borrowed to cover a semester’s tuition continues to rise. It’s like getting a great deal on financing but paying $200,000 for a Honda Civic. It is a scam. If college administrators were really worried about access to undergraduate education rather than fattening their own compensation packages, they would be supporting initiatives such as Texas governor Rick Perry’s $10,000 bachelor’s-degree project, toward which higher-education professionals have been notably cool if not hostile.
Government-subsidized borrowing produces bubbles, as we saw with the millennial housing boom. When economic and political conditions cause those subsidies to be reduced, the irrational and unsupportable nature of the underlying economic arrangement is thereby exposed, with predictable consequences: soaring finance costs, defaults, and generally dysfunctional markets. In this case, the consequences are likely to be borne by people who took out outsize loans when they were teenagers without the financial sophistication to calculate whether that journalism degree really was worth $150,000 in debt. And unlike mortgages and most other forms of consumer borrowing, student loans are treated like taxes and criminal restitution: They cannot in normal circumstances be discharged in bankruptcy.
Defaults on student loans have been on the rise, which is a source of enormous economic risk: Student-loan debt is about equal to all credit-card debt, and, like those dodgy subprime mortgages of a few years back, that debt is securitized and spread throughout the financial system. Because of the structure of the Stafford loan program and other federally subsidized loans, the pricing of risk — which is to say, the relationship between interest rates charged and the creditworthiness of the borrower — is even more tenuous than in subprime mortgages.
If universities are confident enough that the value of their product is sufficient to justify the associated financing cost, then they should get into the lending business themselves, in the same way that automobile manufacturers set up finance companies to help consumers buy their products. But the universities are not eager to get into that business, suggesting that they know that there is in fact a disconnect between price and value in the higher-education market.
A far better practice would be to privatize student lending entirely. If the federal government or the states want to give needy young people money to help them to attend college, then it would be best just to give them the money rather than to entangle them in debt. The more students and families are forced to pay out of pocket, the more incentive the universities will have to keep prices down. Harvard and MIT are always going to be Harvard and MIT — which is to say, expensive — but of all the things that the federal government has to worry about, the ability of the incoming classes of the Ivy Leagues and their families to look after their own interests should rank fairly low on the priorities list. Students working for a B.A. and a shot at a middle-class life at less rarified institutions would benefit much more from smaller tuition bills than they would from higher debt. Graduating from college broke but debt-free is far from the worst alternative.
The House is likely to pass the Senate bill, which is similar to legislation that already has passed the lower chamber. But the long-term interests of American college students and their families would be better served by addressing the underlying causes of tuition inflation rather than exacerbating them, which is precisely what student-loan subsidies do. Perhaps one day a Secretary of Education Perry could make a project of that.