A few weeks ago, I wrote here about the fact that Congress’ ‘fix’ to interest rates on college loans was small potatoes compared to the rapid inflation in the underlying principal. Moreover, I noted, most of President Obama’s proposals for making higher education more affordable have the economics precisely backwards. Today, AEI’s Richard Vedder sounds a similar note over at Bloomberg:
The president’s proposal has one very bad idea: a forgiveness boon for those paying off loans right now. The proposal, limiting loan payments to 10 percent of income, potentially relieves millions of students from repaying part of their obligation. So why not major in fields the economy values least — anthropology or drama instead of engineering or math — if you don’t have to worry about earning enough to pay off your student loans over a certain period?
The idea simply raises incentives for future students to borrow more money, if they know their obligation to pay it back is capped. That, in turn, allows colleges to keep raising costs.
Obama proposes to ignore or worsen the root cause of much of the explosion in student costs: the federal financial assistance programs that encourage schools to raise costs and that haven’t achieved their goals of providing college access to low-income Americans.
As Vedder notes, virtually all of our federal policy on higher education (and most of the policy proposals that have any traction at the moment) generate precisely these kind of perverse incentives. Recommended reading.
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