More loans are not the answer

Amid the tumultuous debate of the health care reform bill, an important issue fell by the wayside. Since 1965, private banks have received subsidies from the federal government in order to support lending to students for higher education. Under the new program within the health care bill passed by Congress, instead of receiving a subsidized student loan from a bank, federal student loans will come directly from the Department of Education. This shell game, much like the health care bill in which it resides, will do nothing to address the underlying problem of high costs in higher education.

In passing the bill, the Democrats’ rationale was that evil, greedy bankers were making a profit off student lending, adding to unnecessary costs. This theory is indicative of leftists’ broader worldview which fails to recognize the free market as the most efficient system for providing the best product at the lowest price. The profit motive is a major incentive for containing costs and lowering prices. When programs are taken from the private sector and placed in the epic sink-hole that is the federal government, all cost containment efforts disappear.

This education overhaul is a classic example of the government rising up to “correct” the problems which it caused in the first place. Tuition for higher education is not too high because of profit seeking bankers. Tuition is too high because massive subsidies by state and federal governments encourage it to be. When the government floods students with extra funds to pay tuition, universities have a direct incentive to raise their rates. If the government got out of the student loan business all together, university tuition would fall out of necessity.

Should the federal government remove itself completely from the student loan sector?

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The bill also lowers the amount which students have to pay out of pocket for their tuition, both at the time of their education and during the subsequent repayment period. Such efforts only lower the cost of taking out more loans. When the cost is lowered, many students will be encouraged to use more credit. As mentioned before, when loans increase across the board, tuition will increase as well, creating a self-defeating cycle that only benefits universities and not students.

Furthermore, the subsidization of higher education encourages students who would be better off learning a trade to go to a university. Students can see that subsidized higher education would be a much more enjoyable experience after high school than entering the job market. Or, as Milton Friedman put it, “Attending classes, taking examinations, getting passing grades—these are the price they pay for the other advantages [of being in college], not the primary reason they are there.” The end result is that many students go off to college, put themselves in debt, and leave with degrees which are of use to no one, or worse yet, no degree at all.

The bill also claims to help the less affluent attend universities, but you can bet your buttons that it won’t do that either. As described by Director’s Law, government programs which claim to help the poor are almost always designed to help the middle class at the expense of the wealthiest and poorest individuals. Wealthy individuals will not apply for the new federal grants. The poor will remain largely unaware of the program. Those who do apply will find college tuition still too expensive despite the grants. The middle class will be the only real benefactor.

In the end, students, the poor and everyone else would be much better off if the government just got out of the way. Prices would fall, and those for whom higher education makes economic sense would go to college; others may find that trade schools, sales, or entrepreneurship are more sensible opportunities and thereby save themselves from lifelong indebtedness. It is unfortunate that such an important issue was able to slip through the Congress without any real public debate. As a result, rising tuition will be the norm for years to come.

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