Hillsdale College, the privately funded bastion of conservative thought, printed in its, Imprimis, Richard Vedder’s article, “Federal Student Aid and the Law of Unintended Consequences.” He commences his opinion with his overall conclusion that “Federal student financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives.”
Before I summarize the factual and philosophical underpinnings of his opinion, which for the most part I agree with, I want to set forth my own philosophy regarding education and my own experiences with student aid. From my studies, travel abroad, military experience and educational experience both here in the US and in Spain, I generally think that education is the bedrock of our democracy and vital to our nation security and economy. Education is or should be a door that is readily accessible to all of a nations citizens regardless of economic, political or social status. It is the great equalizer and ultimate meritocracy. The only impediment to accessing education should be if one does not possess the academic ability nor the aspirational desire or discipline to acquire those skills necessary to succeed in a university or college environment.
As for my own anecdotal experience, I never received any federal aid for college or law school and finished my education with a very modest private loan that I paid off in 3 years after law school. While in school, I knew many that had federal loans that used them to enhance their social status by buying stereo systems, fast cars, living in expensive apartments or ill planing their work load. It also appeared to me that eligibility for federal loans favored those students who married early, procreated quickly and accumulated debts and were therefore needy and deserving of a federally guaranteed loan. I was single, childless, debt free and therefore did not merit a loan. This left me thinking that no aid should go to any students except those with physical or mental handicaps and that any governmental involvement should be made just to lower the cost for all students.
Mr. Vedder states the following: “the relationship between educational spending and economic growth in negative, or at best, non-existent. In the past four decades in which the proportion of adults with 4 year college degrees tripled, income equality has declined. If financial institutions can lend to students for car loans they can do so for education. Pell grants that were designed to assist the poor, have become middle class entitlements. Student loan debt now exceeds credit card debt. Medium age of those having student debt is 33, with approximatly 40 % of the debt is held by people 40 years of age or older.”
He then set forth eight things he finds wrong with federal college aid.
(1) Interest rates are set by politicians and not the market. This causes distortions in the market. Below market interest rates (championed by both Mitt Romney and Pres. Obama), distort the market by causing too much money to be borrowed for education. (Supply and demand–when money is too artificially available or plentiful, or stated another way, too much money is chasing a product of limited quantity or chasing a highly sought after and over-priced/valued product; i.e., “.coms” and the housing bubbles, in such situations the price/value of the product is artificially inflated and therefore over it is over-priced for the value derived therefrom. In fact we made be currently riding an education bubble.)
(2) Markets self adjust by players within the market “who have skin in the game” and therefore suffer consequences when loans are not paid and therefore they either decline to loan or charge higher interests rates when there are greater risks or less likelihood of a pay off–this has the effect of naturally curbing bad decision making by the barrower and the lender. In higher educational institutions, this bad decision making occurs when colleges enroll students that use federal loans to pursue low-paying careers or obsolete careers. Then when the student graduates, they may have greater periods of unemployment or even upon obtaining work in her chosen field is unable to pay the loan because the top wages in that chosen field are so low the student cannot pay the loans off. Furthermore, the institution that provided the education has no accountability because if the student defaults, its already been paid in full and the gravy train proceeds despite how many of its graduates fail financially (if failure is measured by the inability to pay off school loans). The result is that the US tax payer ends up being on the hook and being held accountable.
(3) When a third party pays for a commodity that another person, who is the actual costumer or consumer, acquires or receives the benefit from, the price artificially escalates because the actual customer has no incentive to minimize the cost/expense. This is what happened to health care; i.e., once insurance companies started paying the bill, doctors raised their prices and customers didn’t bother shopping for less expensive alternatives. Consequently, doctors had no incentive to compete but an incentive to race each other to increase their prices. The same is occurring in higher education.
(4) The federal government now has a monopoly in providing student loans–which lends itself to all the negatives of a monopoly–no incentive cut costs and innovate to be more efficient.
(5) Fed loans intrude on privacy because they require extensive personal information from the students.
(6) The number of students graduating in specific disciplines is far greater than the number of jobs therein,
(7) Easy money lends itself to the temptation of using it for non-education related expenses (just like people took out 2nd and 3rd mortgages on their homes to pay for expenses beyond their means), and
(8) The Pell grants are awarded in a manner that incentivizes the borrowers to be less adept and/or less industrious because the circumstances make them more eligible for grants so the are ipso facto rewarded by getting more grants.
While the extent of these adverse consequences are debatable, I do think Mr. Vedder is correct except on a few points. First, education, in and of itself, like exercise, ads value to the educated and to society at large. While it should be tethered to practical outcomes like finding a specific job in a specific occupation, its greatest achievement is providing graduates with a foundation that equips them with the flexibility to advance and progress in multiple careers, as needed, in a changing job market. Study after study has shown that college graduates enjoy healthier and more satisfying lives. The fact is, we would be a “richer” society if all of our workforce had a college education no matter what they did to make a living.
On the other hand, I have always believed that every effort should be made to make college as inexpensive as possible–for all students, but not necessarily through federal grants and loans. Moreover, I am not so sure that the Federal or State Government, however well intentioned, are in a position to achieve this goal without actually having the opposite effect.
What do you think?
Loren M. Lambert © July 18, 2012
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