Why The Student Loan Market Is Insane

Why The Student Loan Market Is Insane
businessweek.com

Let's say that banks could set rates based on risk and this did force lower quality colleges to reduce their tuition. Those colleges would bring in less revenue and program quality would likely suffer, possibly resulting in a feedback loop. Meanwhile, ivy league universities that are funded primarily by endowments would be able to raise their tuition without burdening their students, who would be able to afford larger loans given that they would be paying lower interest rates. In short, rich schools get negligibly richer while poor schools get significantly poorer. More importantly, Ivy league program quality would not improve significantly while lower tier college programs would spiral downwards.

If the goal is to promote quality education, the current system lets ivy league students subsidy lower tier college students to some extent. It makes more tuition dollars available to institutions that depend entirely on tuition at the price of restricting tuition dollars available to institutions that are less reliant on them. The status quo has significant advantages over what this article proposes. Higher default-rates are a problem, but the lesser of several evils (unless you happen to be a banker).

North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S.. In most provinces, tuition is still expensive enough to be considered an investment, but cheap enough that thrifty living, summer jobs, and a minor scholarship or two can see you through undergrad without debt. It's a different approach that's worth considering.

Perhaps schools with a lower default rate should get a higher interest rate... the banks are leaving money on the table. Students attending schools with a higher default rate should get the lowest rate and more government support (grants/bursaries/scholarships).

Or perhaps the student loan "industry" should not be focused on how to make the most money from students. It should be focused on higher graduation rates, higher paying employment for graduates, and perhaps even employment in strategic fields (i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years).

And private industry (aka the banks) should not be in the business of student loans at all. It should be 100% government funded and run, with the goal of being a non-profit. It's hard for me to see any added value that private industry brings to the table for it's "share of the profits" (do they help sell a student on getting a loan? is servicing/tracking a loan so complex that the gov't couldn't easily run a loan servicing application?).

Profit is the incorrect incentive for student loans (again it should be graduation rates, higher paying employment, perhaps even employment in strategic fields).

Few NBA players make million dollars a year. But that does not mean if government provides cheaper loans for basketball training it would produce more millionaires or even increase overall quality living.

If government meddles in education, forces banks to give cheaper loans it only means one thing. A big "Student Loan Bubble".