Wednesday, June 11, 2014

Obama's Action on Higher Education Debt: Throwing Gas on the Fire

Recently President Obama passed an executive order aimed at aiding some of the millions of Americans struggling under the burden of student loan debt.  Ultimately, however, the actions taken by the President fail to address what is ultimately the primary problem with this issue, and, in fact, only make the issue worse.  As the President and so many in the media see the issue, the problem is that there are too many graduates unable to pay off their student loans due to a lack of jobs during this period of economic recovery.  The solution, from this view, is to offer relief in the form of reduced interest rates, reductions in the size of accepted payments, and administrative oversight efforts by the Department of Education to encourage loan servicing companies to endeavour to work with loan-holders in default.  This view, unfortunately, suffers from the crippling malady of only focusing on the immediately seen results of recent events while missing entirely the fact that the unseen causes of those events are of the same variety of the sort that the President has proposed, thereby ensuring the perpetuation of the problem, rather than the solution.

The problem is not, as the President has suggested, the fact that so many now suffer under student loan debt, but rather the fact that economic incentives are such that students feel compelled to accept such loans in the first place.  Ultimately, the problem stems back to the sky-high costs of higher education, but where from can we derive the reason for that price?  From the exact set of federally-guaranteed loan programs designed to "increase access" to higher education.  In the face of such guaranteed revenue, what incentives have colleges to lower prices?  With the assurance of future loan-rate reductions, what incentives have borrowers to spend years working to save up the funds to pay for their education outright?  All the while, the initial problem of access to higher education due to the cost of attending continues to worsen.  As well as any issue, that of higher education should hold clear lessons on the consequences of government attempts to intervene in the market. 

1 comment:

Larry Eubanks said...

"fact that economic incentives are such that students feel compelled to accept such loans in the first place."

I'm uncomfortable with a couple of aspects of this idea. (1) It seems to me no one compels another to borrow money. So, I don't understand what "students feel compelled" might mean. (2) I'm also not sure why "accept" has been used. I think a person asks to borrow money from another person. Maybe the person accepts the loan. But, I think the borrower accepts the terms on which the loan is made, and this means the borrower promises to take certain actions in order to receive the asked for loan. The borrower also accepts terms which include certain specific consequences for failing to take all the required actions in order to receive the loan.

The main point of the post is on target. The politicians point to the seen, and they miss the unseen. When we see the unseen, we see that the self-interested politicians may be saying "nothing to see here." That is, the seen that is pointed to is the consequence of earlier government actions that subsidized student loans.