Freedom Line Blog

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.

Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

When it could be $87 billion.  The $77 billion swing is the difference between making a real payment towards bringing down the exploding federal deficit and a token gesture.  In today’s Wall Street Journal, Education Secretary Arne Duncan confirms a plan put in motion when the department got “emergency powers” during the credit crisis last year to continue access to student loans.  After explaining why the federal government is prohibiting private banks to participate in federal student loan programs, Secretary Duncan concludes with a cursory listing of what will be done with the projected savings.

As for the $87 billion we’ll save from ending the troubled FFEL program, the administration seeks to use that money for important programs that will improve our economic future. We propose to substantially increase scholarships in the Pell Grant program and other financial aid for low-income students. We would start new programs to raise college graduation rates and strengthen our community colleges. We will expand our investment in early childhood education. Plus, $10 billion would be set aside to reduce the deficit.

But if a little deficit reduction is good, isn’t a lot better?  Realistically, if Duncan was serious about deficit reduction he’d apply the entire savings to that end.  As it is, $77 billion of the money saved will go towards new spending in the form of higher loan amounts, “strengthening” community colleges, and “investing” in early childhood education.  None of these programs will pay for themselves in a way that off-sets their direct cost to the federal taxpayer, which, according to Duncan, is the main reason federal control in this area is needed.