NCPA - National Center for Policy Analysis

Today's Student Loan Recipients Are Tomorrow's Economic Elite

May 23, 2012

President Obama recently took to college universities and late night talk shows to tout his plan to keep student loan interest rates fixed at 3.4 percent.  Since 2008, the federal government has effectively socialized the student loan market by enacting laws to eliminate private lender participation in administering federal loans, says Economic Policies for the 21st Century.

This has three sweeping impacts that must be noted.

First, by providing loans at below-market rates, the government leaves itself exposed to unacceptable losses on risky loans.

  • Student loans owned by the federal government have grown from $111 billion at the end of 2008 to $425 billion as of December 31, 2011.
  • This is equivalent to a compounded 56-percent annualized growth rate.
  • With a 9 percent default rate among borrowers in the most recent cohort and no collateral to cushion default severities, the program's interest rate would be insufficient to cover expected credit losses at today's default rates.

Second, the president's advocacy for government subsidization of student loans is at odds with his position of taxation of the wealthy.

  • The president would like to increases taxes on the wealthy, allowing for a portion of the government's augmented revenue to pay for the subsidized student loan program.
  • This conveniently ignores the fact that this tax would fall on the very types of people it is meant to help, namely those who pursued higher education.
  • Studies continue to show a strong correlation between educational attainment and income, with the median weekly earnings for college graduates in 2012 being 1.6-times that for workers whose highest degree was high school.
  • This policy would create an unnecessary cycle of wealth redistribution -- students already have significant incentives to invest in higher education (even at private sector lending rates).

Third, the government's subsidies are partially to blame for skyrocketing tuition rates.  By making loans amply available to potential students, the government incentivizes schools to raise prices in response to cohorts of students with easy money.

Source: "Today's Student Loan Recipients Are Tomorrow's Economic Elite," Economic Policies for the 21st Century, May 10, 2012.

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