School loan cruch

The subprime problems continue to spill over into other credit markets. Now student loans may be hit. Pete Davis has a long post that explains what's going on in the market:

What's behind all of this?

First, the mortgage crisis has driven investors away from securitized assets, including student loans. That has driven up the cost of financing student loans beyond the interest income and fees from those loans.

Second, last year, the law on student loans was changed, effectively cutting the federal subsidy in half.

Third, a pitched battle has been fought mostly between Republicans and Democrats over who should make student loans. When President Clinton came to office in early 1993, he was able to establish direct lending from the taxpayers to students, but just about every student loan bill until last year's pared back direct lending in favor of private lending.

Now that the mortgage crisis has spilled over into student lending and private lenders are pulling, you have to ask yourself, "Why are we going through this?"

I've been asking myself that about student loans for quite some time. It's still not clear to me how much, if at all, they benefit the students they are supposed to help. It seems at least equally plausible that they're simply feeding the tuition inflation which makes it impossible for a normal kid to work his way through college--that is, that all the benefits of the student loans are not being appropriated by the students, but by the faculty and administration, and the non-borrowing students, who get to enjoy the shiny new facilities that tuition inflation helps pay for.

In fact, by relieving immediate price pressure, they may make poorer kids worse off, because they have to pay back all that inflated tuition with interest--they can't even discharge the debt in bankruptcy.

That's just one story you could tell, of course; I've no doubt that college administrators can come up with a rousing defense of tuition inflation. But I find it hard to believe that the relief from price pressure hasn't had at least some effect.