American student loans – the Chronicle

During the recent Democratic presidential debate, Senator Elizabeth Warren reflected the concerns of millions of Americans, Republicans and Democrats, when she expressed her intention to write off the student debt of 95% of Americans. As the student loan bubble grows larger, the details of the policy surrounding government loans shift further into the realm of mainstream political discourse.

However, much of the rhetoric on both sides is driven more by emotions than grounded in theory and history. A more informed perspective might suggest a hands-off approach to student loan policy that can help ensure greater macroeconomic stability and long-term prosperity. Of course, while it is difficult to tackle all the intricacies of student loan policy in one column, I hope my admittedly heterodox perspective might lead more politically engaged students to take an interest in alternative policy prescriptions.

The government really got involved in student loans in 1958, with the Perkins Federal Loans Program and the National Defense Student Loans Program. The Perkins Loan was a needs-based program that offered loans at a fixed interest rate of 5%. In 1965, with the first version of the Higher Education Act, the state intervention in the area of ​​student loans was doubled by establishing a program of guaranteed student loans, through the federal program of loans for students. family education. Since then, the federal government has started to interfere more and more in the loan market, further skewing the results, leading to a history of significant instability.

Over the summer, I had the opportunity to go through almost every report from the Government Accountability Office (GAO) and the Congressional Research Service (CRS) regarding student loan policy. The vast majority of these reports were either complaints or warnings about bad incentives, too cheap credit, lack of accountability, corruption, and general waste due to immunity to market signals. Clearly, since credit is too cheap, too many people are borrowing too much money and they simply cannot afford to pay off a large chunk of their loans. Beyond that, the state-controlled bureaucracy is insensitive to the pressures of market-based competition, resulting in bloated administrations, unbalanced budgets and painfully substandard service.

Instead of restoring the state Following accountability, as almost all politicians, regardless of their stripe, seem determined to do so, perhaps we should consider reducing the role of the state in allocating scarce credits, and returning that duty to the market. The price system is the only way to aggregate the preferences and resource constraints of all participants in the economy. Without market-determined rates, risk is over-subsidized, and the consequences of over-subsidized risk are all too familiar to macroeconomists who saw what cheap credit did to the housing market in 2008.

But what do we do with all of our current student debt? Cancel that? Such an attempt would represent a bill of $ 1.6 trillion that taxpayers will have to pay, which is roughly thrice as important as annual Medicare spending. Not only would this create a huge moral hazard for future borrowers, who might view periodic bailouts as inevitable and borrow for education they don’t need and likely won’t use, but even a one-time bailout would disproportionately benefit investors. rich by a staggering amount (about half of all student loan debt is held by the richest 25% of households by income). Such a huge grant would do little to curb the rising costs of education that have plagued American families for years, and would likely cause colleges to increase costs even more, given the increased demand created by the grants. .

At the heart of this problem is also the culture which suggests that everyone needs a certain degree. Many jobs do not actually require college training, and more and more people are paying for degrees that do not have the same gain that they used to do. What we may need is a fundamental change in our education system that prioritizes practical skills related to employment.

More urgently, however, we need to move towards a higher education market that is more strongly rooted in market principles, rather than in a utopian faith in the capabilities of the state, which has repeatedly failed to reach the end of the spectrum. desired goals.

Nikhil Sridhar is a senior from Trinidad. Its “laissez faire et laissez passer” section is published every Monday.

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