The false promise.
It seems to me that the big problem is that there is no relationship between student loan rates and prospects of paying them off, because the government got involved and completely eliminated the connection between them. In a sane world, an art history degree would carry a much higher interest rate than an engineering degree, and the market would send a signal to the students that maybe they weren’t making the best choices in major.
[Update a while later]
More thoughts from Jerry Pournelle:
What everyone seems to overlook is that the cost of college tuition will always rise to exceed the amount of money seeking tuition. The more money the government puts into the market, the higher the price of college, and it will trickle down from Harvard to the meanest community college. When more money chases goods, the price of the goods goes up; and if government then acts to increase the money supply, the price will rise without limit. Evan as I write this, the faculty of the California State Universities is voting to authorize a strike because they have not had raises in four years, poor things. The California State Universities were in the master plan to be the State Colleges, undergraduate institutions kept cheap and open essentially to everyone qualified to be in a a State College. They were to incorporate the State Teachers Colleges, and be the primary undergraduate education system; outstanding students would be accepted at or allow to transfer to the State University system, which would have a monopoly on graduate education.
The State College took over the State Teachers Colleges and next thing you know they needed to offer graduate degrees in education (although there is no evidence that those who have graduate degrees in education are any better at teaching, and in fact California State Colleges for twenty years taught such an ineffective system of reading that the illiteracy rate in California soared; but that’s for another story. If you know anyone about to enter the California state public schools, go to www.readingtlc.com and get my wife’s reading program so the kid will learn to read even if the teacher is a Cal State grad.) Anyway, all the Cal States offer graduate degrees in everything, and most of them are not very useful; but so long as the money supply lasts the costs will continue to rise, the faculties will be paid and paid and overpaid and pensioned off at very high levels, and the dance will continue.
So now it is becoming manifest that not only is the public school system nearly worthless, but half the graduates of the higher education system are unemployable.
There are solutions to this, most of them drastic, and we know how to have good higher education institutions. But so long as we are willing to pay for it, we’ll continue to have what we get. Charlie Sheffield and I played with this decades ago in a book called HIGHER EDUCATION. Alas it is not yet a Kindle book (I’m working on it). But the decay of our institutions of higher education under the relentless attacks of the government shoveling in money and the Iron Law assuring that the money will be accepted and overspent continues. And the beat goes on. We sowed that wind a long time ago, so why are we astonished at what we reap now?
Not all of us are.
[Update a few minutes later]
Glenn Reynolds expands on the thought:
What would a serious student-loan reform look like? Well, it would look more like normal loans. Students’ ability to borrow would be based on the likelihood that they’d be able to pay. Plus, loans would be dischargeable in bankruptcy if things turned out badly.
Right now, student loans are sold on the basis that “college” promotes higher earnings. But “college” isn’t an undifferentiated product. Some degrees — say in Electrical Engineering — increase earnings dramatically. Others — in, say, gender studies — not so much. A rational lender would be much more willing to finance the former than the latter.
Oh, and in ordinary credit transactions, creditors bear some risk. Loan someone money that they can’t pay back, and you take a loss if they go bankrupt. In the housing bubble, this discipline broke down because the people writing the loans weren’t going to hold on to the mortgages. Similarly, colleges today get their money upfront; if the student can’t pay it back, that’s someone else’s problem.
Let’s give colleges some “skin in the game” by making them absorb the loss, or at least part of it, if students can’t pay. Perhaps if students can’t pay their loans by 10 years after graduation, they should be allowed to discharge them in bankruptcy, with the institutions that got the loan money on the hook for, say, 20 percent of the loss.
If not a higher percentage. This would go a long way to fixing the broken incentive structure. But what Obama is proposing is just more of the same, pouring more gasoline on the flames.
[Afternoon update]
More thoughts from Nick Gillespie, and a response from Instapundit. Yes, humanities degrees aren’t intrinsically worthless, but the way that many of them are taught these days makes them so in many cases.
If tuition weren’t distorted so entirely by government subsidies and intervention, then a college degree wouldn’t cost as much as a house. So if you wanted to be an art professor, you could without having to make as much money as an accountant or engineer.
Loans being made irrationally after gooberment gets involved, distorting a market and pushing prices sky high… Didn’t we have a market correction in real estate a few years ago after a similar bubble?
If I understand the logic of finance an lending (And I’m certainly not a banker), the lender charges interest to offset the risk he is taking by lending the money. Hence a good credit score gets you a lower interest rate at the bank than someone with a poor credit rating.
So, if student loans are guaranteed they logically carry no risk to the lender. Shouldn’t they carry a zero percent, or at least no more than 1%, interest rate?
Interest doesn’t only cover risk, it also covers time preference. Having the freedom to spend your money as you wish is preferable to not being able to touch it for a year, so even without risk you’d want a fee from the bank to put your money in a savings account. On the other hand, the bank (supposedly) keeps your money safe, and logically that carries a fee too.
I see that. I wasn’t as clear as I should have been.The lender is going to want a return on his investment and the longer the wait before the investment starts returning income the higher that return should be. I was just trying to emphasize the ‘risk’ factor which usually has a major say in loan interest rates.
I think (and I use that term loosely) is that what I’m really aiming at is a better approach to assigning intererst rates. I remember my interest rates were pretty much market standard 6%-8% depending on the year of the loan. I’ve got mine all paid off which is really going to piss me off if the government does a bail out for the whiners out there now.
But I digress. I’m thinking something like a “college student credit score” based on the students declared major and GPA. All of the loans would start with a fairly high interest rate since incoming Freshmen don’t have any history to judge. Maybe a point or two lower for the STEM majors if their high school transcripts look promising for them to finish their degree.
After that…..adjustable rate. Carry a 4.0 as an EE major and your rate drops to 1.5%. Carry a 2.5 as a and see your rates climb to 10% or more.
I guess the point I’m trying to make is the same as was raised By Mr Simberg in his original post. I was just trying to generate a little more comment on how such rates would be decided.
Once upon a time this all began as the National Defense Student Loan Program, and its purpose was to increase the supply of scientists and engineers needed to build the aircraft, missiles, and submarines for the Cold War rearmament and upgrade of the armed forces. So, loans were primarily for specialties that were needed and in short supply for national defense. This was a continuation of the logic that founded West Point primarily to insure that the US had the engineering talent in-country to build fortifications and bridges, now that we no longer had the Royal Engineers available for that purpose, and there was no civil engineering school in the country. Gradually, what began as a limited program targeted to a specific clear national need experienced mission creep and has blossomed to an entitlement. Kind of like the space program.
Jim,
Exactly. And the second part of that story is that states originally funded colleges and university to meet the workforce needs of the state’s economy and provide a source of expertise for industries that were critical to that specific state. But as federal research grants and financial aid became available after World War II state colleges and universities moved away from that model to become “World Class” research institutions and forgot about what the needs of their state. The result is that students often get degrees that require them to move out of state for work while the faculty focus on research that is of little benefit to their state.
There are also structural issues that cause tuition to go up. There are large fixed costs like maintaining a gigantic campus and satellite campuses. For state schools they often get money for building new facilities from state legislatures but when it comes to maintenance, they are on their own. Add into the equation that there are a lot of buildings over 100 years old.
Wodun,
Also add in that the percent of the budgets of state colleges that state’s fund has been dropping for the last 30-40 years years, both in terms of percentage and in inflation adjusted dollars while states demand that the schools do more.