The Corner

Fact-Checking the Student-Loan Mess

The Washington Post’s “fact checker” took Senator Lamar Alexander to task on Wednesday for a claim he made a week ago, that “Democrats, when they passed the health-care law, took $50 billion from over-charging students and used it to reduce the debt, pay for Pell grants, and pay for the health-care bill.” While Senator Alexander may not be entirely correct on this, the press itself (including the Post) misrepresents things far more when it blindly accepts the claim that there were huge “savings” from the 2010 take-over of the student-loan business by the federal government.

For starters, the federal student-loan program is dysfunctional. As it has exploded in magnitude, two things have happened. First, the cost of college has increased dramatically, faster than people’s income. As then–education secretary Bill Bennett said 26 years ago, that is no coincidence. Somewhat reminiscent of drug dealers peddling dope, colleges lure financially unsophisticated teenagers into borrowing money to “invest” in their future, pushing the demand for higher education up relative to the supply, which then leads to both higher prices and artificially large college enrollments. This produces, on the one hand, ever larger amounts of student indebtedness on the one hand, and on the other, too many college graduates, leading to the age of the college-educated bartender, taxi driver, janitor, and retail clerk, all struggling to pay their debts.

Second, in large part as a consequence of the above, high college costs have turned off lower-income students, and the proportion of recent college graduates from the lowest quartile of the income distribution is smaller today than in 1970, when loan programs were in their infancy. I suspect, on balance, the loan program has reduced lower-income persons’ access to college.

In short, neither the Post nor Senator Alexander can see the forest for the trees. But further, the savings to American society from the 2010 governmental take-over of the student-loan program are mostly illusionary. We have eliminated loan-servicing options for students and decreased financial counseling, replacing a diversity of financing options for a monopoly run by the folks that give us such models of efficiency as the U.S. Postal Service and Amtrak. The government’s use of ten-year time frames in projecting costs and revenues is another joke, given evidence of inaccuracy in previous such projections. But it is undeniable that this loan takeover was part of the so-called Affordable Care Act, and that it provided a rationale for some Obamacare funding.

But is Senator Alexander correct when he claims students are being “overcharged?” Whatever student-loan interest rates are – 3.4 percent, 3.85 percent (the latest Senate compromise attempt), 5 percent, even 6.8 percent – they are almost certainly lower than what the forces of supply and demand would make them in a market economy without governmental distortions. No one forces students to take out federal loans — even now they can go to banks, but largely don’t because of higher interest rates. Given student loans’ high default rates, long periods before loan repayment begins, etc., the government is offering a rate that unsubsidized lenders cannot match. The interest rates on student loans are generally lower, say, than when what borrowers pay on car loans, and the risks of loan loss are actually higher, since 45 percent of four-year students fail to graduate from college in six years.

In reality, the wrong people (the federal government) are charging the wrong interest rate to the wrong number of borrowers (too many). Neither the Post nor Senator Alexander grasps that essential fact. 

— Richard Vedder is director of the Center for College Affordability and Productivity and an adjunct scholar at the American Enterprise Institute, and he teaches at Ohio University. 


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