Student loans throw us further into debt

In Opinion

The logic behind the government takeover of student loans to college attendees is a classic case of irrational economics gone wild.

However fascinating the proponents’ arguments are, the unintended consequences of this program are what students must pay attention to most. Far from making college more affordable, this program threatens to destroy any hope of individuals paying for college with their own savings or help from their parents. The inevitable result of which will be the death of private college institutions as well as a bulk of the tax payers’ wealth.

Why do students need enormous loans to go to college in the first place? Could it be because the government has taken over the education industry? In California, tuition rates have soared – almost the same way corporate health insurance premiums have soared – because our dysfunctional, gerrymandered legislature can’t balance a budget. At a time when CSUs and UCs are raising tuition to ghastly heights, many students are wishing there were private colleges that would come in and compete with the government.

Our state’s college affordability crisis is really a crystal ball into what a health insurance public option would look like. At first it would put private insurance out of business with its low rates, but eventually the federal government – incapable of paying its bills like our state – would have to raise everyone’s premiums the same way Anthem Blue Cross did two months ago in California, and the same way Cal State Fullerton is doing to us students today.

The student loan system setup, as it was, allowed banks to lend to students with the explicit guarantee from the government that if those students defaulted on the loans, the American tax payer would pay the difference. The consequences were predictable: Banks lent to just about any unemployed 18-year-old with no assets without fear of default. It was a sweetheart deal for bankers, bad for tax payers and raised the cost of tuition by allowing everyone to pay for college no matter how insane the costs already were, as it eliminated normal market forces that would force colleges to compete for students’ money.

Free market economist Peter Schiff, famous for predicting every last detail of the housing collapse, and a candidate for Senate in the state of Connecticut, explained that, “The reason that college tuition is so expensive is because government has guaranteed loans to make it easy to borrow money to pay whatever inflated prices universities want to charge. If students didn’t have access to those government guarantees, college prices would be falling so that students can afford to go.”

In a separate argument, President Barack Obama claimed that banks were serving as an “unnecessary middleman” when it came to providing student loans, since banks collected interest. This was downright laughable, as the same “middleman” argument could be used when it comes to car loans, home loans and business loans.

Obama’s “middleman” explanation regarding interest is essentially Karl Marx’s theory of “value added.” In actuality, interest is what gives people incentive to lend, deters poor investment and keeps the supply of money within the economy limited so that prices aren’t in a state of hyperinflation.

The new government loan program may look attractive to students – and will probably help in buying their vote – but it’s a disaster for tax payers. First, it caps the amount a borrower has to pay each year to 10 percent of their income. After 20 years, regardless of how much is left on the balance sheet, the loan will be forgiven forcing taxpayers to swallow losses on the very same loan they just provided.

“Under this system, basically, it might mean that a student that borrows a $100,000 … might have to pay back the same amount of money that someone would have to pay back if they borrowed $70,000 under the old system,” Schiff said. “Students doing the math will be more willing to assume larger loans … well the colleges can do the same math and now they know, ‘Well, we can raise our prices even faster now.’ ”

This assertion that colleges will jack tuition up even further under Obama’s new loan program was also argued by the Wall Street Journal, which wrote of the government loan policy, “Not that students will actually benefit from this subsidy explosion. Colleges have reliably raised prices to capture every federal dollar earmaked for education financing.”

As college education becomes more expensive, the government will try to do more to help its constituents. Schiff said that as tuition rises, “there’s going to be pressure on the government to say, ‘Well we’ll forgive the loans in 15 years, we’ll forgive the loans in 10 years, or we’ll cap it at eight percent of your income or five percent of your income … and all that’s going to do is feed the rally even more.’ ”

The more the government tries to subsidize further and sweeten the deal for borrowers, the more colleges will raise prices, creating a vicious cycle.

All this and no one has even explained how the United States government, now roughly $13 trillion in debt, can provide loans when they have no money. The same students who get government backed college loans will really be getting a loan from China – or worse, phony money off the Federal Reserves printing press. It’s likely students will have to pay back the interest not just on their loan, but the interest the government has to pay for the money they borrowed to make that loan. This of course means higher taxes.

Welcome to the real world college graduates.

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  • Adam Smith

    Lol @ Cryn. Congrats on having three posts and adding nothing to the commentary.

    The economics of this are relatively simple, and this piece is well researched and well written.

  • dx

    Matt says:
    April 21, 2010 at 11:01 pm

    Perhaps you should take your own advice. Mr. Schiff is not an economist, he is a stock broker that holds free market ideals. Ideals that point out the relationships between rising costs and government interference.”

    Actually, Peter Schiff is an economist. He’s a economist who believes in Austrian Economics, not the Keynesian ideas that populate government and media. And yes, he’s pretty much spot on what he predicted.

  • Ty

    The first part of the article makes an interesting, and likely true, point about colleges raising tuition because of the federally backed guarantee to lenders. However, If the government’s new plan is put into place, there will likely be little change. It already is a terribly messed up system, and this plan might not alleviate the problems in education, but it isn’t going to make things worse.

    The argument that essentially states: “if private banks are middlemen in the education loan business, then they are when lending for cars, homes, or business as well,” is inherintly flawed as the US government does not guarantee car loans. So as it stands now, the banks are in fact middlemen when we are speaking of education loans. That being said, if the federal government itself is being repaid directly (with interest of course) it will generate revenue, and will also not have to pay interest on subsidised loans from private lenders. This is a two point fiscal advantage for the governemnt regarding education loans. Naturally institutions of higher education will seek the most financially advantageous positions for themselves as well, but it likely will not be much different from what they are already doing.

    The prediction that if you stop giving enough money to students colleges will have to lower their tuition rates is just that: a prediction, and has no more merit than a prediction with an opposite conclusion. I feel though the prediction is plausible, it feels more like propaganda to add more content to the article.

    There is a flaw in the interpretation of the debt forgiveness plan as well. The debt forgiveness after 20 years only applies to graduated students who obtain qualified positions of “public service,” and must continue to work for the government for the entire 20 years, missing not a single payment. It’s still not the greatest idea in many people’s opinions, but we should strive for accuracy when discussing these issues. You can contact the DOE for more information on this.

    I am also not certain what “welcome to the real world, college graduates” is supposed to do for the readers. Supportes of the article and the views in the article may get a little more charged, but those oppsed to the views displayed in the article will take it only as an insult to their intelligence. As a whole, I enjoyed the article, but I feel the points it was trying to make could be strengthened if the opinionated tone was silenced. Keep it informative, accurate, and interesting, and the point you wish to make will come across without readers judging the character of the article intstead of the content.

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