Tuesday, October 30, 2007

The Real Student Debt Problem

My latest piece for the American Prospect
is about student loan reform and what comes next:

...no serious remedy is on offer for the elephant in the room: tuition increases themselves.

Even if reformers succeed in eliminating FFELP--cutting the lenders altogether out of federal student loans, as all the major Democratic presidential candidates have advocated--the college cost problem will not be solved. We'll lose less of the federal higher ed budget to corporate subsidies, but colleges will continue to raise tuitions faster than inflation and more and more private loans will keep filling in the gap at higher cost to students.

We can try to control tuition directly, by rewarding colleges that keep costs down and punishing those that don't. We can promote competition on cost: spotlight the best community colleges, distance learning programs, etc. Even form better ways to rate these types of programs to raise their profile a little. And we can try to limit the loans available to students. That's what restoring bankruptcy protection for private loans will ultimately do.
Just as the growth of "creative" mortgages fueled the runup in house prices, the growing availability of student loans doubtless had some influence on the rise in tuition.


13 comments:

Adam said...

I wrote an economic naturalist essay on exactly this! I'm glad to see you point out that it's the over availability of funds that has likely triggered such staggering increase in the price of higher ed.

A simple supply and demand curve shows that when you remove price sensitivity to the buyer (students) by way of subsidizing their expenditure (tuition paid by easily available student loans) then you ultimately shift the demand curve to the right resulting in both increase quantity demanded at every price point as well as increased price at every quantity point.

Bravo!

Now, since this has been identified, how do we solve the problem? Wish I had been able to come up with an adequate answer in my essay. My guess is that we do something that makes lenders start making borrowers adhere to some criteria... as you mentioned, lifting bankruptcy protection for student loans. This, however, will then decrease the number of people who receive student loans which makes education less available. Vicious cycle. And one I wouldn't advocate using my tax dollars to combat. But, that's just me.

It seems to me that the student loan system (in general) is set up as "fairly" as possible in that those who have the opportunity to benefit from receiving them are the one's who pay for them. Pull it out of the private sector? Fine - just make sure it stays in the black if it's going to be a federal program. I don't know that doing that changes much. Corporations making profit or an inefficient federal bureaucracy burning through money. To me, it seems to be six in one, half dozen in the other... At least corporations make profit that is distributed to shareholders. Then again, government programs employ people who can't get a job in the real world. Once again... maybe it's a wash?

Either way, I doubt you'll see any change in tuition prices unless you remove the inflationary pressures created by students who are insensitive to price (at least until they have to repay their loans.)

Anonymous said...

Imagine if postsecondary institutions faced a matching requirement to participate in guaranteed loan or direct loan program? This would require them to have some skin in the game and control costs. Instead, the requirement is backwards: Schools are permitted to receive as much as 90 percent of overall institutional revenues from the federal student aid programs (student loan, pell grant and work study). Adam, if you are talking federal programs, then you are talking private contractors. "Bureaucrats" are probably 10 or 20 percent of the fte. They aren't writing system software or taking phone calls from borrowers. You must think that America's aircraft carriers and fighter jets are built by bureaucrats as well? If you are talking guaranteed loan, you are talking state agencies, which are a mixed bag. Some are primarily hard-core government bureaucrats, while others are semi-public "authorities," and others are essentially outsourced.

adam said...

Private contractors who are governed by what? Government agencies. Private contractors who are held to some standard? I doubt it's much of one.

I realize that the government outsources the nitty gritty, but agencies are created to outsource it, regulate it, fund it. By the time it's all said and done it is far less efficient than the private sector is alone.

Like I said, though, there are trade-offs either way. I just have my preference on which trade-offs benefit me the most.

Anonymous said...

It is not clear where in the American student loan universe you are seeing private sector running things. Direct loan and guaranteed loan have both private sector involvement and government involvement, and it is not clear which approach has more government involvement. Even the private education loan sector, which has no involvement from the federal education dept., was seeded through state monies and/or tax-exempt state bond issuances and continues to have significant state govt involvement. It is possible that it will be able to "fly on its own" at some point in the near future.

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