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.” In it, Vedder commenced his opinion with his overall conclusion that “[f]ederal 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, with which for the most part I agree, 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 U.S. and in Spain, I generally think that education is the bedrock of our democracy and vital to our national security and economy. Education is, or should be, a door that is readily accessible to all of a nation’s 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 I finished my education with a very modest private loan that I paid off in three years after law school. While in school, I knew many with federal loans who used them to enhance their social status by buying stereo systems and 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, 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: “[T]he relationship between educational spending and economic growth is negative, or at best, non-existent. In the past four decades in which the proportion of adults with four-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 approximately 40 percent of the debt 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 President Obama), distort the market by causing too much money to be borrowed for education. (Supply and demand is negatively affected when money is too artificially available or plentiful. When too much money chases a product of limited quantity, or chases a highly sought-after and over-priced/valued product (i.e., “dot-com” and housing bubbles), the price/value of the product artificially inflates and becomes over-priced for the value derived therefrom. In fact, we may 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. Loan officers either decline to loan or charge higher interests rates when there are greater risks or a lower likelihood of a pay off. This skepticism has the effect of naturally curbing bad decision-making by the borrower and the lender. In higher educational institutions, this bad decision-making occurs when colleges enroll students who use federal loans to pursue low-paying, or obsolete careers. Then, when the students graduate, they may experience greater periods of unemployment or an increased inability to pay the loan, because the top wages in their chosen fields are so low they cannot afford to pay off the loans. Furthermore, the institution that provided the education assumes no accountability, because if the student defaults, the institution has 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 U.S. taxpayer ends up hanging on the hook.
(3) When a third party pays for a commodity from which another person (the actual costumer or consumer) acquires or receives the benefit, the price artificially escalates because the actual customer has no incentive to minimize the cost/expense. This is what happened to healthcare (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 felt 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 operates a monopoly in providing student loans, which lends itself to all the negatives of a monopoly: no incentive to cut costs and to innovate to be more efficient.
(5) Federal 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 (think of those people who took out second and third mortgages on their homes to pay for expenses beyond their means).
(8) Pell grants are awarded in a manner that incentivizes the borrowers to become less adept and/or less industrious, because the circumstances make them more eligible for grants so they are ipso facto rewarded by getting more grants.
While the extent of these adverse consequences is 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 19, 2012
Before I summarize the factual and philosophical underpinnings of his opinion, with which for the most part I agree, 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 U.S. and in Spain, I generally think that education is the bedrock of our democracy and vital to our national security and economy. Education is, or should be, a door that is readily accessible to all of a nation’s 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 I finished my education with a very modest private loan that I paid off in three years after law school. While in school, I knew many with federal loans who used them to enhance their social status by buying stereo systems and 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, 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: “[T]he relationship between educational spending and economic growth is negative, or at best, non-existent. In the past four decades in which the proportion of adults with four-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 approximately 40 percent of the debt 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 President Obama), distort the market by causing too much money to be borrowed for education. (Supply and demand is negatively affected when money is too artificially available or plentiful. When too much money chases a product of limited quantity, or chases a highly sought-after and over-priced/valued product (i.e., “dot-com” and housing bubbles), the price/value of the product artificially inflates and becomes over-priced for the value derived therefrom. In fact, we may 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. Loan officers either decline to loan or charge higher interests rates when there are greater risks or a lower likelihood of a pay off. This skepticism has the effect of naturally curbing bad decision-making by the borrower and the lender. In higher educational institutions, this bad decision-making occurs when colleges enroll students who use federal loans to pursue low-paying, or obsolete careers. Then, when the students graduate, they may experience greater periods of unemployment or an increased inability to pay the loan, because the top wages in their chosen fields are so low they cannot afford to pay off the loans. Furthermore, the institution that provided the education assumes no accountability, because if the student defaults, the institution has 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 U.S. taxpayer ends up hanging on the hook.
(3) When a third party pays for a commodity from which another person (the actual costumer or consumer) acquires or receives the benefit, the price artificially escalates because the actual customer has no incentive to minimize the cost/expense. This is what happened to healthcare (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 felt 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 operates a monopoly in providing student loans, which lends itself to all the negatives of a monopoly: no incentive to cut costs and to innovate to be more efficient.
(5) Federal 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 (think of those people who took out second and third mortgages on their homes to pay for expenses beyond their means).
(8) Pell grants are awarded in a manner that incentivizes the borrowers to become less adept and/or less industrious, because the circumstances make them more eligible for grants so they are ipso facto rewarded by getting more grants.
While the extent of these adverse consequences is 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 19, 2012
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