More ain't better when it's killin you

More ain't better when it's killin you

Government is a reason for the student loan crisis, not the solution.

Student loans have become a fiasco in the United States, and the situation is only getting worse. In fact, Consumer Reports now apparently considers student loans a dangerous consumer product.  The cover story of the latest Consumer Reports magazine details some of the sad stories of people who are being crushed by student loan debt - people who say things like, "I feel I kind of ruined my life by going to college."  The story proposes to explain "How we made this mess, who's to blame, and what you can do about it." But hold on to your wallets, consumers, because Consumer Reports has the story wrong, and your dollars are on the line.

The story - the fiasco - is about bad debt. There are 42 million student borrowers in the United States, and "one in four borrowers are behind in their payments".  According to this story, "The federal government holds about 93 percent of the $1.3 trillion in outstanding student loans. That makes the Department of Education, effectively, one of the world's largest banks".  And despite its history of faulty loans, this big government bank just keeps issuing them.

So basically, millions of Americans have taken out loans they can't repay, from a lender that doesn't care if they do.  Sound familiar? It's the same storyline behind the subprime mortgage crisis in 2008. Although the magnitude is smaller - bad student loans are a problem worth hundreds of billions, compared to bad mortgages worth trillions - the individual repercussions can be more severe. Student loan debt can't be ejected in bankruptcy court like mortgage debt. So this story represents a twist on the now-familiar tale of the modern, debt-fueled financial crisis.

Now that we know what the story is about, let's jump right to its silly conclusion:

... in 2015, the Obama administration launched a pilot program to test whether federal employees could effectively take over the job of collecting on defaulted student loans, while being more helpful and less aggressive than private collectors. ..."We need to eliminate the private collection agencies from this process,” [Deanne Loonin] said. “They are incentivized just to collect money, not to work out ways that might be better for the borrowers. We need to see what else might work."

Seriously? This is like a morbidly obese man believing his problems will be solved by a more comfortable wheelchair. Would we rather be more comfortable with our symptoms, or cure our disease?

After all, it's obvious what ails us.  The federal government is responsible for 93% of outstanding student loans.  These loans have minimal eligibility requirements and one-size-fits-all terms.  As a result, they also have such high default ratios that they are coming to represent a threat to the American economy.

The government is actually responsible for more than just the magnitude of bad student loans.  According to the Federal Reserve Bank of New York, it's also responsible for the magnitude of student debt overall.  In 2015, this Fed branch published a staff report article titled "Credit Supply and the Rise in College Tuition." This report explains that "Yearly student loan originations grew from $53 billion to $120 billion between 2001 and 2012, with about 90% of originations in recent years occurring through federal student aid programs. Against this backdrop of increased borrowing, average sticker tuition rose 46%".  It finds "the passthrough of increased student aid supply to tuition is around 50 cents on the dollar, on average" ((ibid. pp 19.)) In other words, government-supplied "easy money" is the driving force behind skyrocketing tuition.

Some seemed surprised by the New York Fed's conclusion. Bloomberg mused, "The surging cost of U.S. college tuition has an unlikely culprit: the generosity of the government’s student-aid program". It's not so "unlikely" when you consider the basic economics of the situation.

What is the economic effect when the government encourages everyone to go to college, and provides easy money to enable them to do so?  Consider President Obama's position on higher education: "... President Obama challenged every American to commit to at least one year of higher education or post-secondary training. The President has also set a new goal for the country: that by 2020, America would once again have the highest proportion of college graduates in the world. ... President Obama and his Administration are working to make college more accessible, affordable, and attainable for all American families."  In economic language, the government is "driving up demand." And what happens when demand for something increases? The price goes up. So the government's role in skyrocketing tuition is the opposite of "unlikely" - anyone who has completed a basic economics course should be able to predict it.

Thankfully, the solution to this fiasco is also basic: STOP. Our government shouldn't be issuing loans to people who are highly unlikely to have the means to repay them. It harms these people by making them lifelong slaves to their debt, it harms taxpayers who have to cover their defaults, and it harms the economy as a whole in countless other ways.

More to the point, our government shouldn't be in the student loan business at all. If student loans were left to the free market, people wouldn't be so frequently duped into taking out impossible loans.  It would be hard for a sub-par student to take out $50k for a fine arts degree, and it would be easy for an excellent student to take out the same amount for an accounting degree. Student loan terms would better fit each particular loan.

We are watching the federal government build up another debt crisis - this time in the area that is most critical to the future of the American economy: education.  But there is a silver lining hidden in the federal government's overwhelming domination of the student loan business; we know exactly who to blame for our student loan problems. It's clear that more government involvement in the student loan business - as debt collector in addition to lender - is not the solution. It's also clear that issuing government-backed student loans to anyone who wants one is a bad idea. So let's stop. Let's leave the student loan business to the market, where it belongs. Let's rely on the market to bring the necessary accountability, and get rid of the unnecessary economic dysfunction and human suffering the government is creating. And let's make this change soon, because American consumers aren't going to enjoy the next debt crisis any more than the last one.