Student loans have probably never been less popular than they are now. They're a burden on young adults and a drain on the economy. So why not just scrap the whole enterprise?
That's what Ohio University Professor Richard Vedder is suggesting this week on Bloomberg View. He advocates getting Washington out of the student lending game entirely by nixing the Department of Education's direct loan program without reviving the old system of subsidizing private bank loans. In the meantime, he'd spend some of the savings on additional grants for "low" or "fairly low-income" students.
Sound reasonable? It's not. Here are three reasons why getting the government out of the student loan business is a miserable idea.
1) STUDENTS WILL BE DEEPER IN DEBT ...
If you yank away cheap federal college loans and leave it to the banks, students are going to have to pay more for their education. This is obvious, but it bears repeating. Struggling graduates are going to have to struggle harder.
How much harder? It's tough to say, but we can start to guess by looking at what private lenders are charging now. Federal loans max out at about 6.8 percent for students. Meanwhile, companies like Discover Financial Services and Sallie Mae are offering fixed rates as low as 5.75 percent and as high as 12.75 percent. So we can assume a few students with exceptional credit might get a great deal. Many more would pay credit card rates on their education tab. That's terrifying, considering that the average borrower today owes more than $20,000.
Those sort of rates will keep some potential students from enrolling. To thinkers like Vedder, this is more of a feature more than a defect. How can that be? Well, his main concern is college "over-consumption," not affordability. In other words, he's worried that too many people are going to school for degrees they supposedly don't need or won't finish.
Here are two reasons why that's utterly wrong-headed. First, even if some students are not getting a great return on their education investment, most college graduates are still in far better shape than their less educated peers, with half the unemployment rate and vastly higher lifetime earnings. And the more our economy rewards skills over manual labor in the future, the greater that divide will become. That's going to drive more students to college, if for no other reason than they'll need it to survive financially. Second, student debt saps life out of the rest of the economy. When young people are busy paying back loans, they're not saving for a down payment on a house or car. Making a degree more expensive to pay will make all of us -- every single person affected by America's GDP at least -- a bit poorer.
2) ... AND POOR STUDENTS WILL GET IT THE WORST
Without a government guarantee, banks will treat student loans like other kind of transaction. The safest borrowers will get the best rates. The riskiest borrowers will get the worst. Here's what that translates to: Poor people and minorities, who tend to have worse credit scores, will pay more. If they can get a loan at all, that is. As Mark Kantrowitz, publisher of Finaid.org, noted to me, more private lenders are now considering the size of a borrower's or cosigner's income when deciding whether to hand out a student loan. "We'd be returning to a system where college was only for the wealthy," he said.
But what about those vouchers? Well, theoretically they could soften the impact, but it wouldn't come free. We're already spending $36 billion on Pell Grants for low-income students, which covers less than two-thirds the cost of attending a community college and about one-third the cost of a bachelor's program. Without more than doubling what we're laying out for Pell, low-income students would still be in danger of getting cheated of an education for lack of affordable or available loans.*
3) MORE STUDENTS WILL DROP OUT
As I wrote last week, students who borrow for college have significantly lower dropout rates than students who try to go through school debt free. There might be a few reasons for this: people who work long hours, go to school part-time, and delay enrolling until later in life all tend to have trouble finishing school. These are the sorts of things low-income students have to do to avoid loans. So making student debt costlier, or more difficult to come by, will encourage students to make the bad choices that put them in danger of dropping out school. That's something we can all live without.
*In his article, Vedder points out that low-income students have no trouble getting credit cards or car loans. To which I say: They have to pay credit card rates on those credit cards. And car loans are easy to get because they come tied to collateral: the car. Nobody is going to repossess a student in default.