The big national debate is now, of course, focused on the attempts of the Obama administration and the Democratic Congress to dramatically deepen the government’s role in the health care system. But off in the wings is an effort to takeover another private market function – the market for student loans. Sadly, such a takeover would be disastrous for both students and taxpayers.
In today’s economy, most prospective college students must unfortunately take out substantial loans to finance their educations. Reportedly, 70% of all UNH students today are taking out loans to finance their educations. A significant portion of such loans currently comes from the private sector, with government subsidies and guarantees provided to keep interest rates low. What we have now is a reasonably functioning system of public-private-partnership. But, the Democrat’s plans to end such subsidies and have the government become the sole provider of student loans would exacerbate existing problems in the system and ultimately lead to another multi-billion dollar bailout.
The reasons are clear: first, with the government making the decision as to who is qualified to take on tens or even hundreds of thousands in student loan dent, credit is virtually guaranteed to be extended to those who will be unable or unlikely to pay it. This is precisely what happened in the market for mortgage financing where Congress jaw-boned the government sponsored entities Fannie Mae and Freddie Mac into facilitating hundreds of billions of dollars in loans that were destined never to be repaid once the bubble in real estate prices (which itself was driven by the reckless extension of credit) came to an end. Government is not very good at this job.
Second, with the federal government providing the funding, the skyrocketing cost of tuition is likely to accelerate. Highly publicized stories of military procurement scandals, such as the $800 toilet seat, the $500 coffee maker, and the $400 monkey-wrench are a sad testament to the federal government’s skill as a purchaser. And lest anyone believe that the Democratic Congress will do anything to control such costs, it must be remembered that the sacrifice they ask of everyone else will not likely be visited on academia, one of their core constituencies and principle source of recruiting. The end result will be even more crippling education debt burdens than exist today.
Finally, such a plan will undoubtedly spawn yet another government bureaucracy. Although currently such plans promise that such loans will be serviced by private sector lenders, excessive regulation and pressure from unions representing federal government workers will ensure that such obligations will be serviced at greater cost and with the legendary responsiveness and courtesy of the Democrats’ favorite institution, the Internal Revenue Service.
The argument being made in Washington is that by eliminating the profit from student loans they will be cheaper. They have recently made the same argument in the case of healthcare insurance. The most worrisome aspect of all of this is that it shows a fundamental lack of understanding of basic economics.
Profits are a return to the efficiencies of doing a good job. No one will pay extra just for the thrill of it; there needs to be a good reason for such charges before people will shell out their hard earned money. At the same time, profits are a signaling device to the rest of the market that encourages new players, ultimately bringing in competition and thus increasing innovation and improved service.
But the core point is that government should not be in the business of providing private goods and services, much less being the monopoly provider. And coming full circle to the current debate over government controlled health care, it is informative to remember the original rationale for federal involvement in the student loan market at all – to provide choice and competition. Now where have we heard that recently?
Bob Bestani is a Candidate for the U.S. Congress in NH’s 1st Congressional District and is a Visiting Scholar at Stanford University.
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