Unintended Consequences

     Typical of the intrusive government intervention that has descended on America with a fury in the last two decades (if not more), a heavy hand that provokes unintended but harmful consequences, is the federal financial loan program to aspiring college students.

     It sounds magnificent on the surface: the children of the poor are enabled by taxpayer dollars to attend college, better themselves, triumph over their origins and bring prosperity to themselves and their posterity. As President Obama said not long ago, “College education cannot be a luxury. It’s an economic imperative that every family must be able to afford.” Really?

    What sounds inspiring on the surface is most problematic in practice, and college loans have become primarily a tool for the wealthy (who receive a disproportionate share of Pell Grant money) and an albatross for most recipients, whose college education today prepares for little that is productive in the job market and saddles them with tens of thousands of dollars of debt that can take a decade or more to repay. And as colleges have become addicted to this government money, any decrease in revenue will harm the poor as colleges will favor wealthy full-tuition payers over scholarship cases even more than is customary today.

   Richard Vedder, a professor of economics who recently addressed this matter in a speech at Hillsdale College (published in Imprimis, and available at Hillsdale.edu), exposed the flaws of both the program and its implementation, as well-meaning as it sounds on the surface. It is a classic politician’s program, with immediate and visible benefits and hidden, distant and high costs.

    The program is a loser for several reasons: first, it has caused a tremendous escalation in the cost of college tuition, far in excess of the rate of inflation. My college tuition, for example, at an Ivy League college in the 1970s, was likely 10% of what tuition is today. The availability of easy money increases the tendency of borrowers to borrow and of merchants to increase the price of what they are selling, especially when the money is coming from a third party, not being repaid quickly, and with waivers that delay repayments for years.   How does third party payment disrupt the marketplace? Look at how health care and coverage costs have been jacked up over the last thirty years – again, far in excess of the rate of inflation – and we have a hint. College education in elite schools now cost more than $50,000 per year, for an education that frequently consists of absolutely useless courses in bizarre and wacky fields that will never be converted to market use, and with regular partying thrown in as a bonus (and of course, all tabs paid much, much later).

Second, the program forces government to regulate the interest rates on these loans, rather than allow the market to set the rate. With interest rates artificially low, students wind up borrowing more money than would be needed and further induces colleges to raise their tuitions. And the government – unlike a regular institution – does not distinguish between borrowers who are likely to repay and those who don’t have a prayer of repaying. Since the government has monopolized the college loan market, it too faces no consequences in case of student default, as the US government is already borrowing the money (probably at a higher cost) that it is then lending out to these students. And colleges get the money up front, and face no consequences if students default, or, for that matter, if they drop out.

Which is the third major problem: probably 40% of Pell Grant recipients receive college degrees within six years, meaning that most of the people who do not graduate also do not have the ostensible benefit of a college degree but they do have the enormous debt as constant reminders of their failure. It is similar, in that sense, to another oft-obscured statistic: the percentage of affirmative action admissions to elite schools that drop out within a year or two, a percentage that would be even higher if not for the grade inflation that marks college education today. (The numbers crunch out at a roughly 25% dropout rate but exceed 40% in some schools.) Thus, blacks who would excel in other schools are forced into failure to accommodate white social-engineering.

Some of the college dropouts even use their student loan money just to support themselves, or just to live “free.” Well, sort-of free, because they have no expectation of repayment, and vote-seeking politicians are the first to grant extension after extension, and then (as Obama did not long ago) even suggest that the loans be forgiven to those can’t repay – effectively making those who did repay highly-educated fools.

The easy money has led to a sharp increase in the number of college graduates ill-prepared for jobs in their preferred fields, with many of them ill-equipped for any jobs. Thus, Vedder notes that there are in the US today 107,000 janitors and 16,000 parking lot attendants with bachelor degrees. This is not only a function of the poor job market, but also a recognition of the reality that many are simply not educated enough to succeed in the professional jobs that were once the province of the college graduate. Many graduates lack the reading and writing abilities, and critical thinking skills, that are usually indispensable for material success.

The current aggregate debt of college attendees is approximately one trillion dollars, 40% of which is held by people in their 40s and older! It doesn’t seem like much, for a government that now accumulates more than a trillion dollar debt annually. (In numbers, that’s >$1,000,000,000,000!) But it adds to the discontent of the young, the feeling of hopelessness and powerlessness that leaves them vulnerable to the smooth talk of politicians who promise them the world at someone else’s expense.

Add that to the decadent and debauched lifestyles on campus today (to be addressed another time), and one wonders why anyone goes to college. The answer seems to be: they’re handing out free money, so why not? The Talmud (Tamid 32a) states: Who is wise? He who foresees consequences. And little more wisdom in government and on college campuses would be most welcome.