Unintended Consequences of Federal Student Aid

by cpmy3rs

The rise of “for profit” Universities (if one must stoop to calling them that), has led to a rather perverse incentive structure. As a recent Senate hearing revealed, one need only buy a struggling college (for ‘legitimacy’) before aggressively recruiting desperate students who are unable to find meaningful employment after graduating high school without meaningful skills — and without the grades to have other options. Or, as one ITT Technical Institute document put it, “poke the pain a bit”, until you have successfully bullied your recruit into buying your product. The next step, of course, is to have the overwhelming majority of them apply for (and receive) student loans while telling some of them to lie in order to get more money.

It is tempting, after seeing that last part, to make the counter-argument that — were loans of this nature left up to private entities (i.e., banks) — this sort of abuse would not occur. The National Review Online gives a nice sample of this argument.

Simply put, we reached the point years ago at which the traditional colleges and universities could no longer accomodate the demand — that’s where for-profit schools stepped into the picture. And, because we have increased higher-ed subsidies so dramatically, both traditional and for-profit schools have increased tuition to capture their share of the rents. Tuition inflation routinely outpaces other measures of inflation. Tuitions at for-profit schools are particularly high.

Rather than curb the subsidies — a move that by itself would reduce the cost of postsecondary education — Obama’s [Department of Education] would prefer to use a price control, and boy, have they come up with a doozy.

This is an argument which is persuasive if taken at face value. The flaw in the model, however, is an assumption that private entities would not engage in the same sort of reckless lending to borrowers who were unable to pay for the (well beyond their means) purchase they were about to make. One could look at the buildup to the financial crisis of 2008-2009 to see an obvious counterpoint or, since the exact role of federal subsidies in that mess is still being debated, one could ask the following question:

If declaring bankruptcy is not guaranteed to absolve one of student loan debt, then could loans be packaged, insured, and sold on the market the way mortgages were? If I had to venture a guess, I’d go with yes.

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