In seeking to refute my plan for a market-based reform to the federal student loan system, a liberal commentator falls into a familiar trap: misplaced faith in the government to save us from ourselves.
My plan was to end the government’s policy of lending at the same interest rate regardless of the default risk of the degree program—both the MIT chemical engineer and the University of Phoenix communications major borrow at 4.45 percent even though those degrees represent wildly different levels of risk. If interest rates rose or fell depending on the default rate of the student’s chosen degree program, it would provide an incentive for students to choose programs that are more closely connected with landing a job after college— more nurses and coders, fewer film studies and criminal justice majors. If programs with high default rates wanted to continue attracting students, they would need to lower tuition to compete on price, improve their instruction quality to lower their default rates, or close.
K.M. Lautrec has derided this plan as a “disaster” in Current Affairs. He admirably diagnosed the problem:
“The federal government…will loan students money for any degree, whether low-value or high-value, without judgment and at the same interest rates. Schools, then, have no incentive to provide high-value degrees. No matter what the quality of the program, the feds will pay, and the students and taxpayers will be on the hook. Thus economically rational schools will keep tuition high and not concern themselves with whether they’re providing students with anything of value.”
But, he points out, if we charge students higher interest rates for riskier degree programs unlikely to result in a job, we’ll just wind up making the most vulnerable students worse off. Consumers don’t pay attention to interest rates—look at the subprime mortgage crisis—and so students will continue making the same decisions about education, but now the ones that made bad decisions will have higher interest rates and more debt.
Lautrec thinks that high interest rates only burden the vulnerable and don’t alter behavior—so if the government can absorb the risk, why shouldn’t it? But taxpayers are losing staggering amounts of money on bad federal student loans—net, not gross. Eventually, the piper will have to be paid. Lautrec thinks students can be spared by passing the risk to taxpayers—it’s all grand, until the national credit card stops working.
Of course, students don’t look currently up interest rates because they don’t matter—every student gets the same ones. Lautrec points out that he didn’t know the rates he was borrowing at, but that’s because knowing couldn’t have influenced his choice. He had no reason to ask.
Letting student loan interest rates float would provide powerful incentives for students to shop around for the best rate—an incentive more powerful than exists within any other debt market. Most loans are income or collateral-based; the rate you get is a function of your current wealth. That disincentivizes shopping, because the range of rates you get is limited by a core function of who you are that you can’t easily change. But federally guaranteed student loans are different, because they can be based on future potential. The same presently-disadvantaged student can enter a nursing program that offers a virtual guarantee of a job, or get a theater arts degree with no such guarantee. The sheer range of options and outcomes functions as the best incentive to shop, one that no other debt market provides.
But not everyone will shop, and so we need strong disclosure requirements. Students must be made to see these interest rates, and they must be made to see the way they will take a bite out of their wallet. Conservatives have already taken the lead on requiring these disclosures. Once schools must publicize the interest rate carried by each degree program, that information will show up on every resource students use to research colleges, just like tuition currently does. It will be on the Common Application, it will be on US News rankings, it will be on the federal student aid portal, and it should be required by law to appear prominently on the school’s “apply now” page.
More could be done. Under my plan, rates would be the result of the 10-year default rate for students that graduated from a given school with a given major. Before students know their major, borrowing costs should be fixed, and then adjust downward or upward after graduation based on the choice of major. When students select their major, the school administrator or guidance counselor should be required to provide students with the interest rates carried by each of the school’s degree programs.
What system would Lautrec prefer? A system in which the government has total control over the market by setting the level of federal loan money available for each school:
“If you want schools to lower the tuition for low-value programs, you could limit the amount of federal student aid schools can get for students attending these programs. It’s so much more direct!”
If you thought the current system is bad, Lautrec’s plan would be even worse. Schools would simply set their tuitions at the precise level of federal aid the government decides to make available. This means that we’d have price fixing: the government determines winners and losers. The government is, uh, bad at that. In Lautrec’s world, a school lives or dies based on its ability to get into the good graces of some commissar at the Department of Education. It would be a festival of rent-seeking and corruption.
It’s especially shocking to see Lautrec’s argument being made in the era of Trump. Every liberal who wants to expand the power of government to pick winners and losers should ask how the Trump administration would use that power. If Lautrec’s plan were to be implemented tomorrow, the big winners would be the for-profit schools, who donate handsomely to Republican causes. Plenty of federal aid would be made available to them as a reward. And the Trump administration might note that many of its critics seem to be harbored by fancy Ivy League universities. Maybe their approved levels of aid should be adjusted downward…
Lautrec has a back-up plan: Make schools pay back loans that students can’t afford. A nice system—you default, and someone else picks up the tab. The likely outcome of this plan is that tuition skyrockets even further: schools would be forced to farm payments out of everyone else to cover the growing number of people strongly incentivized to default. And if you think strategic defaults on student loans don’t happen, think again.
Ultimately, Lautrec is upset that conservatives want higher education to look like a market when it is really about so much more. He writes:
“Higher education is as much or more about personal enrichment and exploration than it is about future financial prospects…College, for privileged and fortunate people at least, is about learning what you enjoy and what you’re good at while you also learn how to exist as an adult in the world and relate to other people. Shouldn’t that be the case for everyone? Do we really want it reduced (for poor people particularly) to how much money you will make and when you will repay your loans?
The elitism here is surprising, and it’s worth taking a moment to unpack. Lautrec wants everyone to have the kind of college education he probably did – an odyssey of self-discovery where knowledge was pursued for its own sake, far removed from the cold realities of the market. Unfortunately, those cold realities have a bad habit of showing up uninvited.
Conceptualizing college as a carefree time to find yourself is exactly what’s gotten us into this mess. We’ve valorized the BA out of all proportion to its social utility, and the costs are all around us: a generation of students who took baby boomer platitudes about finding your passion seriously and wound up with theater degrees and retail jobs. Lautrec thinks that the problem is that the college-as-self-discovery experience isn’t happening enough. The problem is that it’s happening too often.
There should be theater majors—but not more than the theater industry can hire. And yet our current system guarantees that this will be the case, precisely because we hide the ball from students and induce them to make choices in the present that will bite them when they graduate. Policymakers have an obligation to make sure that students are in the best position possible to confront market reality. If they don’t, that decision will carry substantial human costs, and liberals should be prepared to pay them.
I’ll close by asking Lautrec for a temporary truce—I’m a law student, it’s finals season, and if I keep writing instead of studying, I’m never going to be able to pay back the $200,000 in federal student loans I currently have out.