BCT Editorial – 1/18/07

This page was last updated on January 18, 2007.

College break; Editorial; Beaver County Times; January 18, 2007.

Can Times editorial authors really be as ignorant of economics as their editorials indicate?

Below is a detailed critique of the subject editorial.

“U.S. House Democrats have proposed a plan to cut the interest rates on student loans, thereby making college more affordable for the less fortunate.

“The rate cut would range from 6.4 percent to 3.4 percent on subsidized student loans and be phased in over five years, The Associated Press reported. To pay for the reduction, the government would cut subsidies it offers to lenders and reduce guarantees that banks receive when students default on their loans.

“Democrats said the measure would translate into a college tuition break for ‘millions’ of low- and middle-income college students.”

[RWC] Ignoring the fact I don’t believe the government should take my money to subsidize student loans, let’s look at what this paragraph says.

The editorial claims the interest rate cut would come from cutting “subsidies [the government] offers to lenders and reduce guarantees that banks receive when students default on their loans.” The impression is this is “free” change for the taxpayer.

Let’s remember the reason the government gives lenders subsidies is to cover defaults. If current subsidies cover defaults, wouldn’t reducing the subsidy put lenders in the hole if they continued to make student loans? When lenders can’t make a competitive rate of return on a loan, they won’t make those loans. As a result, lenders will stop making student loans altogether, or will focus on those students most likely to repay the loan on time. I’ll take a wild guess, but I suspect a lender would believe the likelihood of default goes up as the borrowers income goes down. As a result, the net effect could be fewer loans to “‘millions’ of low- and middle-income college students.”

“One of the most important things in today’s economy is for young adults to have access to higher education. If we can accomplish that in part by reducing interest rates on college loans, we should do it.”

[RWC] Elementary economics tells us further subsidizing college tuition will only drive tuition higher. That’s because colleges know they can charge more and because subsidies promote price insensitivity.

Further, we can look at history. For decades we’re been throwing more and more taxpayer dollars at higher education in a stated effort to drive down tuition. Instead, tuition keeps rising at a rate much greater than the general inflation rate. According to www.FinAid.org, tuition inflation from 1989 to 2005 averaged almost double the general inflation rate. From 2001 through 2005, tuition inflation ranged from 1.79 to 4.32 times that of the general inflation rate.

When will we learn?