The Arizona Desert Lamp

A diploma on every wall: the federal bailout, your student loan, and the cost of ‘college for every American’

Posted in Media, Politics, Technology by Connor Mendenhall on 6 October 2008

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How quickly things change. After a few short, sweet days of schadenfreude over the defeat of the Big Bailout, Congress and the President handed $700 billion to Hank Paulson Friday, via the second draft of the Emergency Economic Stabilization Act (now stuffed with more pork!).

Among the paperback-thick bill’s many provisions for government purchase of “troubled assets” is one that ought to interest even broke, apathetic college students. From the Chronicle of Higher Education:

The $700-billion bailout package approved today, while aimed mainly at helping banks that hold many failed mortgages, also will let the government purchase a range of assets related to student loans.

The new legislation, which passed on a vote of 263 to 171, raises the possibility that student-loan providers will be allowed to go beyond the terms established by May’s bailout and sell assets to the government that are based on older federal loans, as well as assets involving the private student loans that banks issue outside the government system of federal subsidies.

Or should it? It’s possible that some students might be paying Paulson soon. Under the terms of the law, the Treasury Secretary needs only to consult with Ben Bernanke and notify Congress before buying bad student loans willy-nilly. Neither have shown a whole lot of discretion when it comes to arranging massive bailouts. But, as Te-Ping Chen explained earlier this month in The American Prospect, there isn’t much of a student loan crisis at all. In fact, the student credit crunch has mostly been drummed up by sore lenders, not struggling students:

Throughout the spring, stung by investor wariness over the sub-prime mortgage meltdown, sales of asset-backed securities — the source of liquidity for many student lenders — contracted. As a consequence, some student lenders were “completely unable to obtain capital to make loans,” says Bob Murray, spokesman for USA Funds, the largest guarantor of federal student loans. “Or they were having to pay significantly more than they were used to.” Factor in the $19 billion industry-subsidy cut Congress approved in September 2007 — after the discovery that lenders were bribing financial aid officers sparked national outrage — and the ranks of lenders participating in the Federal Family Education Loan (FFEL) program, through which lenders like Chase provide capital for federally backed loans, were thinning. Hence the ensuing fear of a student loan “crisis” — which, as it turns out, was more of a lender-inflated narrative (picked up by overly breathy media) than it was a real threat to students nationwide.

Call me breathy, but even though most students aren’t having a hard time finding loans, there are still troubling structural problems in the market for student loans — and most of them are the result of government intervention.

As Mark Perry put it, the unintended consequences of encouraging (and occasionally requiring) government-backed giants like Fannie Mae to give home loans to low-income families and minority borrowers “turned millions of perfectly good renters into terribly bad homeowners.” Fannie and Freddie were part of an awful perversion of the American Dream: By subsidizing green lawns and white picket fences, government set up millions of citizens for the painful fall they’re facing now.

But there’s another absurd dream just as hallowed (and just as dangerous) as home ownership for every American: the expectation that every American should go to college. Just like the well-meaning notion that more people ought to own homes, beatifying the bachelor’s degree has serious social consequences. Charles Murray put it nicely in an article published last month in The American:

However unintentionally, we have made something that is still inaccessible to a majority of the population—the B.A.—into a symbol of first-class citizenship. We have done so at the same time that other class divisions are becoming more powerful. Today’s college system is implicated in the emergence of class-riven America.

The problem begins with the message sent to young people that they should aspire to college no matter what. Some politicians are among the most visible offenders, treating every failure to go to college as an injustice that can be remedied by increasing government help. American educational administrators reinforce the message by instructing guidance counselors to steer as many students as possible toward a college-prep track (more than 90 percent of high-school students report that their guidance counselors encouraged them to go to college). But politicians and educators are only following the lead of the larger culture. As long as it remains taboo to acknowledge that college is intellectually too demanding for most young people, we will continue to create crazily unrealistic expectations among the next generation. If “crazily unrealistic” sounds too strong, consider that more than 90 percent of high school seniors expect to go to college, and more than 70 percent of them expect to work in professional jobs.

Here’s looking at you, kid. Just like the mortgage man sold loans on the mistaken premise that house prices would continue to shoot skyward, students take out loans on the mistaken premise that they must either attend college and succeed, or Fail At Life. That’s too bad, because there are many easily implemented alternatives to both college and college loans.

First, there’s ample room to ease off on emphasizing the traditional liberal-arts bachelor’s degree as a marker of civilized achievement. Hell, many public schools are already tilted towards vocational training and away from the life of the mind (here’s looking at you, kid). This isn’t necessarily a bad thing. In fact, with so many modern technological options for delivering an education in one form or another, there ought to be many alternatives to the bachelor’s degree — online seminars, technical qualification exams, on-the-job training, &c.

Second, if student loans weren’t so heavily subsidized by government, any number of alternative college financing methods might flourish in the market for financing education. I’m a big fan of human capital contracts, an idea first put forth by Milton Friedman, in which prospective students would sell equity stakes in their future earnings to help pay for college. Instruments like these carry less risk for students and eliminate many of the information asymmetries and uncertainty problems inherent in student loans. But since federally-subsidized student loans have long been the policy of choice for promoting college education, more exotic alternatives have been crowded out.

But as long as government continues to be the biggest player in college finance, and politicians keep getting elected by promising free higher education to everyone everywhere, don’t be surprised if the next big bailout “saves” student loans.

EDIT: By the way, this time around Arizona’s House delegation split more or less down the party line (with fiscon John Shadegg and Young-Dem darling Raul Grijalva crossing the aisle), while Sens. John McCain and Jon Kyl both voted in favor of the bailout bill.


2 Responses

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  1. […] on Murray Posted in Media by Connor Mendenhall on October 9th, 2008 My recent post on student loans and the bailout bill included a passage by Charles Murray, normal curve enthusiast […]

  2. Crowded out « The Arizona Desert Lamp said, on 12 February 2009 at 5:17 am

    […] signals and encouraging loads of bad loans, today’s shaky student loan market owes a lot to “diploma on every wall” policies that distort the market for human capital. Worse, it’s way easier to appraise the […]

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