By Dominic Pino
Thursday, April 28, 2022
Let’s start with basics. If you lend someone money,
you expect to be paid back. If you give someone money without expecting to be
paid back, that’s called a gift. Lending implies a desire to be paid back.
If you are considering lending someone money, you will want
to know how trustworthy that person is to pay you back. Even the most informal
lending agreements between kids lending their friends $10 include some kind of
judgment of creditworthiness.
Those basic instincts, which arise from natural and
prudent concerns, scale up to the financial institutions that lend trillions of
dollars around the world. That’s why we have credit scores, loan-approval
processes, and background checks. Financial institutions, at a more
sophisticated level, are doing exactly what any sensible person would do before
lending someone money: making sure the person could reasonably repay the loan.
The process isn’t perfect, and there are plenty of cases of abuse, but in
general, markets do a good job of directing money to where it is most productive.
On student loans, however, Congress decided it knew
better than the markets. In 1965, as part of Lyndon Johnson’s Great Society, it
passed the Higher Education Act, which created federal student-loan programs.
In his speech at Southwest Texas State College before signing
the bill, President Johnson said the Higher Education Act would open “the door
to education” for “a high school senior anywhere in this great land of ours” to
“apply to any college or any university in any of the 50 States and not be
turned away because his family is poor.”
Anyone from anywhere can go
to college anywhere with no financial concerns. That’s the
promise.
Here’s what Johnson was saying, translated from
politician-speak into economics: We’re going to pretend resources are not
scarce and make up the difference between the demand for student loans and the
supply for student loans with government funds.
Over time, the market for student loans, for all intents
and purposes, would cease to exist. All the problems of creditworthiness and
repayment that markets developed institutions to solve would cease to exist as
well. What would not cease to exist, however, are the laws of economics.
Resources actually are scarce, and subsidizing demand for college while
restricting supply of college has real-world consequences.
The most obvious is higher prices. It’s very difficult to
start a new university, and the better a university is, the more it prides
itself on rejecting applicants. That keeps supply down. It’s very easy, by
design, to get a federal student loan and compete for the limited number of
seats that universities offer. That jacks demand up. High demand plus low supply
equals higher prices, every time. And so, tuition soars.
Actual education doesn’t have to cost that much (many of
the most important things you learned in your life probably came from your
parents, who didn’t charge you a dime for it), and there are only so many
professors you can reasonably hire. And we already said universities want to
keep rejecting students to remain prestigious. So the extra money that
universities bring in starts to go to amenities, administrators, and athletics.
As the universities become bloated, students continue to
borrow more money, which the government has guaranteed will be available
to anyone for any university and any major.
For the individual, this is a great deal. Earning a college degree (note that
that is not the same thing as getting an education) is associated with a huge
increase in lifetime earnings compared with those without college degrees. If
you can buy higher lifetime earnings at the age of 18 at less than the market
rate of interest, that’s a steal.
But at the system-wide level, problems arise. A loan
“market” that explicitly rejects concerns of creditworthiness is going to
break. People who weren’t creditworthy and got loans anyway will not be able to
pay the loans back, by definition.
So Congress steps in again to save the day. As part of
the Bankruptcy Reform Act of 1978, Congress established the presumption that
student-loan debt is not dischargeable in bankruptcy. The point of this
provision, as a 2019 Congressional Research Service report makes
clear, was to preserve the federal student-loan system. If recent graduates,
who have virtually no assets, are allowed to declare bankruptcy upon graduation
and have their student debt discharged, the program will only be sending money
out and won’t be bringing any back in. The money has to be repaid by someone,
and it’s a government loan, so taxpayers would foot the bill.
Some progressives now want taxpayer-funded college, but
Congress did not intend to create that when it passed the Higher Education Act.
The progressives who are upset that student-loan debt is treated differently in
bankruptcy than other forms of debt should realize that it’s a natural
consequence of treating student loans differently from other forms of loans.
In 1965, Congress and Lyndon Johnson decided that
student-loan debt was good debt and should be encouraged. Progressives stood
and cheered. They knew better than the market, and everyone would be able to go
to college.
But almost 60 years later, everyone doesn’t go to college
(or want to). The student-loan program has been expanded way beyond what Lyndon
Johnson envisioned, and still, as of 2019, only 36 percent of Americans over the age of 25 have a
bachelor’s degree or higher. The median American adult has no student debt
because the median American adult has never borrowed any money to attend
college.
The progressive beliefs that the laws of economics can be
suspended by legislation, that everyone should go to college, and that the
government should pay for it is what led to borrowers holding $1.7 trillion in
student debt, many of them with useless degrees, while universities blow money
on turning dorms into luxury apartments and hiring hundreds of new
administrators (who still won’t answer phone calls or emails from students in a
timely manner). By forgiving student debt, President Biden would be changing
what was agreed upon as a loan into a gift, at the taxpayer’s expense, while
doubling down on the economic delusions and educational superstitions that will
guarantee that this broken system will stay broken for years to come.
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