As both parties compete for the youth vote in 2012, Republicans and Democrats alike have rallied behind competing legislation which will keep federal student loan interest rates at the very low rate of 3.4 percent. Like the housing bubble that brought down the economy in 2008, a student loan bubble caused by artificially low interest rates threatens to wreak havoc on our economy in the long term.
Rather than encourage further reckless student loan borrowing, free market principals can offer a sensible fix to the growing bubble.
In a free market, lending institutions are free to offer rates comparable to the level of risk they expect to incur. It’s ludicrous that high school valedictorians who pursue science degrees are expected to pay the same interest rate on student loans as mediocre students with “undeclared” majors.
Allowing the education market to operate normally has two big benefits. First, the student loan market would shepherd students into academic degrees that the job market actually demands. For instance, if there is a shortage of nurses, then lenders would offer qualified students who pursue nursing degrees lower-interest loans because they have a high likelihood of post-graduate employment. If there is a surplus of lawyers, cheap loan rates would be offered only to the most competitive law school applicants, forcing those least likely to secure a legal job after graduation to reconsider their career path.
Second, it would encourage only students who are willing and able to take college seriously to borrow. Taxpayers don’t need to provide subsided loans for students whose only interest in higher education is booze and partying.
Similarly, it doesn’t make sense to encourage students who are not capable of college-level work to borrow extravagant sums of money to go to college. These students either drop out with heavy debt, or they become prey to predatory cash-for-degree programs that will happily accept their Stafford loan money but not offer a marketable degree in return.
The government isn’t doing kids any favors by encouraging them to take out $100,000 in college loans when they only have a 50 percent chance of finding a job requiring a college degree. It also isn’t “fair” (to borrow a current liberal buzzword) for taxpayers to be expected to subsidize the educational whims and unrealistic career aspirations of every college student in the nation.
Perhaps most indicative of the current system’s failure, government loan subsidies have helped artificially inflate the cost of a college education dramatically over the years, boosting the debt load of both good and bad students alike. It’s a government intervention “Catch-22:” in trying to make college more affordable by offering cheap loans, the artificial boost in demand increases the cost of college, forcing students to take on an increasingly unaffordable debt burden.
It’s a tough time for recent graduates, but doubling down on anti-market policies can only make things worse in the long run. The take-away from the housing bubble should be that when you fight the free market, the free market fights back.
