THE WESTERN FRONT
Uncle Sam's Tuition Bill
Breaking the culture of dependency on campus.
WSJ.com
BY BRENDAN MINITER
Tuesday, July 26, 2005 12:01 a.m.
Though parents may wonder if their kids learn anything in college economics classes, Uncle Sam certainly has gained an education in market economics from lending to them.
The federal government first got involved in the student loan business on the grounds that, left to their own devices, rational lenders wouldn't offer loans to college students. Who'd lend money to somebody with no job, no visible means of support except mom and dad, and thousands of dollars in annual expenses? Well, the answer is just about every bank out there, as credit card company reps patrolling campus will attest.
Nonetheless, based on its original miscalculation, the federal government has now become the co-signer on nearly every student loan, even paying the loan's interest while the student is in school, and guaranteeing to lenders at least 98% of their principle should the student default. The government also guarantees private banks that they will turn a profit on student loans no matter how low interest rates fall. Under President Clinton, Uncle Sam even started lending to students directly.
This year the federal government will make more than $70 billion in financial aid available by guaranteeing loans, lending money directly to students, or handing out grants. Pell Grants alone will cost more than $13.4 billion next year as 5.4 million students will receive direct government funding (a million more than when President Bush took office in 2000). Moreover, the pressure to keep upping the ante is unrelenting from Democrats and Republicans alike, who never tire as posing as the protectors of children against the scourge of rapacious tuition increases.
Unfortunately, by footing these bills and turning higher education into an entitlement, Congress itself is primarily responsible for isolating academia from normal consumer pressure by shielding most students (and their parents) from the true cost of higher education. That's why schools can keep ratcheting up tuitions beyond what any middle class family can reasonably afford to pay--because they know taxpayers stand ready to take up the slack.
Worse, this culture of dependency doesn't even end when a student walks across the stage to receive a diploma. Yet another subsidy is available to help them "consolidate" their loans. Which brings us to the brave effort of House Education Committee Chairman John Boehner and handful of GOPers who, in a small way, are finally taking steps to impose limits on the student loan boondoggle.
Under the government's consolidation program, former students can lock in a low fixed rate while the interest rate the government guarantees to banks remains tied to the 91-day T Bill. It doesn't take an economist to figure out the problem with this scheme. When the dot-com bubble burst, Fed Chairman Alan Greenspan cut short-term interest rates to historic lows in hopes of getting the economy moving again. Well, students must have learned something in their econ classes after all. Thousand moved quickly to lock in ridiculously low interest rates. Now, as interest rates are rising again, Uncle Sam is on the hook for an estimated $14 billion, not including loans consolidated in the past year.
To make sure this never happens again, Mr. Boehner & Co. would require students either to continue paying a variable rate after they consolidate their loans or pay a premium for locking in a fixed rate, as happens in the private sector. That seems reasonable enough, as do other reforms in the House legislation that would reduce the guarantee the government extends student loans to 95% of the principle. Private lenders would have that much more incentive to do their jobs properly, making sure taxpayer-backed loans go to students who are good risks.
Still, it took a 26-20 party line vote to get the GOP bill out of committee. Expect a floor fight in the House in September, just a parents are dropping their children off at college. Education Secretary Margaret Spellings has already made the administration's support of the House bill clear, leaving the Senate as the big question mark.
Congress is a long way from recognizing its own gigantic role in distorting the tuition market and driving prices out of sight. Mr. Boehner's struggles demonstrate just how difficult it is to bring even a small amount of commonsense reform to the great, unrecognized middle-class entitlement that the federal student loan programs have become.
Mr. Miniter is assistant editor of OpinionJournal.com. His column appears Tuesdays.
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