Should the federal government bail out student loan holders?
Without a moment’s hesitation, the answer is: No! The lenders pressured the Federal Government to remove barriers, restrictions and common sense, creating the opportunity for easy student loans. For decades the established guidelines made money too easily available for too many soft degrees. If more students had pursued degrees in Engineering instead of Business Administration, we might not be in the trouble we’re in. “For the love of money is the root of all evil.”
The problem is one of simple market forces allowed to run amok. Colleges and Universities “sell” a desirable commodity, the Degree. While many today may call it a useless piece of paper we assign it a definite value for purposes of this essay. The degree has a price-tag as set by market forces which includes the supply of raw materials; “students” and the processing capacity of the system; teachers, books, housing, classrooms, and the time needed to push a student through the system.
The schools have two goals. 1) Maintain their brand. 2) Maximize profits. Let’s not kid ourselves, schools require vast amounts of money to operate. Tuitions are set competitively in response to the value of the brand and the the resulting supply and demand curves. This practice worked well through the 1960’s and was even able to handle the challenge of providing a generation of soldiers with GI-bill educations. Proof that the free market builds solid foundations.
In the 1970’s the US Department of Education started to interfere with the market system that had served our nation quite well. Student loans were made more universally available. This had the expected effect of stimulating inflation on the price of a college degree. The market responded predictably and chased rising prices with increased demand. Early on the resulting inflation could be offset with the more available Federal Student Loans, and a justification that the degree was still a valuable commodity for the graduate; it had not yet been inflated to worthlessness.
In the 1980’s Federal credit was tightened, grants dried up, and a new privatized student loan industry was created to supply the now barely affordable tuitions the previous decade had created through inflation. In order to calm the jitters of the investing community and to loosen the reigns on capital, the private lenders pushed for and were given certain guarantees under law. They were guaranteed minimum profits, their losses were insulated by the taxpayers, and their powers to enforce were expanded. In other words the lenders were in a financial utopia.
The natural reaction to an opportunity to invest with guaranteed returns and no risk is to maximize the dollars invested. Lenders worked with school admissions departments offering easy packages and rapid access to funds. The schools quickly realized that with such good friends in the lending institutions that there was money on the table. The schools proceeded to inflate their prices even faster. The lenders didn’t balk at the increases as they faced no risk and greater profit potentials, and no fear of losing clients on either side.
College tuitions skyrocketed due to the easy availability of money. The government simplified the process with tools like the FAFSA streamlining the flow of money into the school application process making grant funds automatically available to students that only had to sign their name to an application. The skids were greased, and everyone was pushing in unison. Tuitions climbed at multiples of the rate of inflation and the dollars continued to flow.
This author will use the term “Adults” to refer to the deans of admissions, and the lenders. The adults knew or should have known that their actions were unsustainable. They were drawn by the lure of easy money. The schools believed that a premium price was somehow equivalent to a premium brand, and that caused them to apply less scrutiny to applicants, i.e. raw materials. The customers were deceived, and the brands were tarnished.
The next object-reference will equate the politicians and government to the “Big Brother” (privately enjoying the gratuitous Orwellian reference). Because “Big-Bro” isn’t the parent he will bend the rules to make the “Kids”, meaning the potential college students and their families, happy. Notice that Big Brother is ignorant to the unintended consequences, and Big-Bro relishes the power of position.
In real life, (just like in real-life), the “adults” are responsible for the bad outcomes of the immature (big-bro and the kids). The lenders knew that they had been handed undeserved largess, and now the bill has come due. Lending money is by definition a risky proposal. That is why lenders charge interest. For decades the lenders were artificially protected; now it is time to remove that protection. Unfortunately the lenders have come to believe that they are dependent on those protections and therefore entitled to them as well.
There are always a few loans that will be noncollectable, such is the nature of lending. The Federal Government should stand behind the loans that truly default, such as when the student dies or becomes incapable of caring for himself due to unforeseen circumstances. This is rather rare occurrence is one of the roots of the lenders phobia. Decades of actuarial tables will show that most college loans are eventually made good and that the lenders never lose money in the long run.
The tightening of credit will have two immediate consequences. Tuition and enrollment will drop, and the market will reestablish some semblance of normalcy to a segment of the economy that has been out of control for decades. Fewer “graduates” means the the value of a degree will rise again. Schools will be come more protective of their brands, and the caliber of college graduates will rise back to what it was in the 1950’s. This will usher in a new era of prosperity.
Time and time again we have seen that Government and Political interference causes unintended consequences. Invariably the negatives outweigh the positives and even the neutral consequences. No matter how noble the intentions, we should learn from out mistakes. We should not repeat them expecting different outcomes. Cracking the whip on the lenders will not destroy them, it will strengthen them. A dose of medicine is the first step to fix a malignant problem.
Just say “NO” to the bailouts.
Should the federal government bail out student loan holders?
Without a moment’s hesitation, the answer is: No! The lenders pressured the Federal Government to remove barriers, restrictions and common sense, creating the opportunity for easy student loans. For decades the established guidelines made money too easily available for too many soft degrees. If more students had pursued degrees in Engineering instead of Business Administration, we might not be in the trouble we’re in. “For the love of money is the root of all evil.”
The problem is one of simple market forces allowed to run amok. Colleges and Universities “sell” a desirable commodity, the Degree. While many today may call it a useless piece of paper we assign it a definite value for purposes of this essay. The degree has a price-tag as set by market forces which includes the supply of raw materials; “students” and the processing capacity of the system; teachers, books, housing, classrooms, and the time needed to push a student through the system.
The schools have two goals. 1) Maintain their brand. 2) Maximize profits. Let’s not kid ourselves, schools require vast amounts of money to operate. Tuitions are set competitively is response to the value of the brand and the the resulting supply and demand curves. This practice worked well through the 1960’s and was even able to handle the challenge of providing a generation of soldiers with GI-bill educations. Proof that the free market builds solid foundations.
In the 1970’s the US Department of Education started to interfere with the market system that had served our nation quite well. Student loans were made more universally available. This had the expected effect of stimulating inflation on the price of a college degree. The market responded predictably and chased rising prices with increased demand. Early on the resulting inflation could be offset with the more available Federal Student Loans, and a justification that a degree was still a valuable commodity for the present; it had not yet been inflated to worthlessness.
In the 1980’s Federal credit was tightened, grants dried up, and a new privatized student loan industry was created to supply the now barely affordable tuitions the previous decade had created through inflation. In order to calm the jitters of the investing community and to loosen the reigns on capital, the private lenders pushed for and were given certain guarantees under law. They were guaranteed minimum profits, their losses were insulated by the taxpayers, and their powers to enforce were expanded. In other words the lenders were in a financial utopia.
The natural reaction to an opportunity to invest with guaranteed returns and no risk is to maximize the dollars invested. Lenders worked with school admissions departments offering easy packages and rapid access to funds. The schools quickly realized that with such good friends in the lending institutions that there was money on the table. The schools proceeded to inflate their prices even faster. The lenders didn’t balk at the increases as they faced no risk and greater profit potentials, and no fear of losing clients on either side.
College tuitions skyrocketed due to the easy availability of money. The government simplified the process with tools like the FAFSA streamlining the flow of money into the school application process making grant funds automatically available to students that only had to sign their name to an application. The skids were greased, and everyone was pushing in unison. Tuitions climbed at multiples of the rate of inflation and the dollars continued to flow.
This author will use the term “Adults” to refer to the deans of admissions, and the lenders. The adults knew or should have known that their actions were unsustainable. They were drawn by the lure of easy money. The schools believed that a premium price was somehow equivalent to a premium brand, and that caused them to apply less scrutiny to applicants, i.e. raw materials. The customers were deceived, and the brands were tarnished.
The next object-reference will equate the politicians and government to the “Big Brother” (privately enjoying the gratuitous Orwellian reference). Because “Big-Bro” isn’t the parent he will bend the rules to make the “Kids”, meaning the potential college students and their families, happy. Notice that Big Brother is ignorant to the unintended consequences, and Big-Bro relishes the power of position.
In real life, (just like in real-life), the “adults” are responsible for the bad outcomes of the immature (big-bro and the kids). The lenders knew that they had been handed undeserved largess, and now the bill has come due. Lending money is by definition a risky proposal. That is why lenders charge interest. For decades the lenders were artificially protected; now it is time to remove that protection. Unfortunately the lenders have come to believe that they are dependent on those protections and therefore entitled to them as well.
There are always a few loans that will be noncollectable, such is the nature of lending. The Federal Government should stand behind the loans that truly default, such as when the student dies or becomes incapable of caring for himself due to unforeseen circumstances. This is rather rare occurrence is one of the roots of the lenders phobia. Decades of actuarial tables will show that most college loans are eventually made good and that the lenders never lose money in the long run.
The tightening of credit will have two immediate consequences. Tuition and enrollment will drop, and the market will reestablish some semblance of normalcy to a segment of the economy that has been out of control for decades. Fewer “graduates” means the the value of a degree will rise again. Schools will be come more protective of their brands, and the caliber of college graduates will rise back to what it was in the 1950’s. This will usher in a new era of prosperity.
Time and time again we have seen that Government and Political interference causes unintended consequences. Invariably the negatives outweigh the positives and even the neutral consequences. No matter how noble the intentions, we should learn from out mistakes. We should not repeat them expecting different outcomes. Cracking the whip on the lenders will not destroy them, it will strengthen them. A dose of medicine is the first step to fix a malignant problem.
Just say “NO” to the bailouts.