The Government is Not the Answer to Our Problems, It IS the Problem

With health care reform consuming the majority of Congress’ time and public’s furor it is no wonder that sweeping student loan bill has quietly made its way through Congress.  Besides, it would be hard to find a student who would not advocate for student loan reform. After all, have you ever tried to fill out a FAFSA? It’s the paper equivalent of Rubik’s cube.  

But is a government takeover the best method of dealing with a hundred-billion dollar a year industry? After all, the Congressional Budget Office has sounded too chipper about the sustainability of our fiscal policy, saying

“[An increase in debt] could result in an economic crisis. Foreign investors could stop investing in U.S. securities, the exchange value of the dollar could plunge, interest rates could climb, consumer prices could shoot up, or the economy could contract sharply. Amid the anticipation of declining profits and rising inflation and interest rates, stock markets could collapse and consumers might suddenly reduce their consumption.”

They actually said that back in the 2003, when people actually batted an eyelash when the words “trillion” and “dollars” ended up in the same sentence. I can imagine they are sweating bullets now since the past 6 years has seen our national debt nearly double from $6.76 to $12.9 trillion. Tack on a potential $1.04 trillion for proposed health care reform and all of the “coulds” mentioned by the CBO turn into “wills.” But as Massachusetts has shown, the public has grown more concerned about the rapid increase in the size of government and the deficit.

The public’s concern has not deterred this administration which has quietly pushed the Student Aid and Financial Responsibility Act (SAFRA) through the House of Representatives. The bill will overhaul the student-loan market by ending the current system of government-guaranteed private loans and shifting all lending to the federal government’s Direct Loan program and Federal Direct Perkins Loan program.

The bill represents the government’s attempt at a solution to a problem of their own creation. In 1993, Congress established a government option to private lenders dealing in student loans, urging that competition would create more beneficial rates. In 2007, Congress mandated that lenders maintain interest rates at levels too low to turn a profit. To keep the system running the federal government began purchasing loans, promising it was a temporary foray into a traditionally private industry. Nevertheless, fast forward two years and the U.S. Department of Education is now set to become the exclusive originator for student loans (beware the parallels to health care reform.)

The downsides to a sole public option are diverse and numerous. First, it’s simply not popular among universities who will be forced to implement it. As Congressman John Kline, the top Republican on the U.S. House Education and Labor Committee said in his floor speech,

“[I]f it’s truly about competition, the best program ought to win in the marketplace. In fact, one program has won – the public-private partnership . . . which is the choice of three-quarters of colleges and universities today.”

Part of the displeasure comes from the poor customer service that walks hand in hand with government bureaucracy. In addition many universities worry about the cost of transitioning between the two programs when their budgets and time are already stretched to the breaking point. Even the U.S. Department of Education admits that “[o]f course, the school must ensure that its systems and processes are, if necessary, modified” and that “a full training calendar to assist schools” will be provided.[3]

Second, it removes choice, competition and the incentive for innovation. As Chuck Sanders, President and CEO of the state-run South Carolina Student Loan Corporation testified before Congress,

“[S]tudents, parents, and institutions are better off with the ability to work with the local, community-based or national organization they desire. If the Direct Loan program is indeed their choice, it should be for reasons other than having no other option at all.”

Choice ensures that lenders remain responsive to the needs of their potential customers as well as keep prices low through competition. On the other hand, a single market player eliminates the incentive to remain efficient, keep costs down, and remain innovative.

Third, the bill does address the underlying problem of the rising cost of a college education and instead will contribute to skyrocketing costs. The government is touting that the bill redirects $40 billion in efficiency savings to increase need-based Pell Grants which serve as the main scholarship vehicle for low income students. The SAFRA Bill increases the total amount of the Pell Grant award and indexes future amounts to inflation plus one percent.  However, this ignores the fact that the annual costs of college has increased 122% at public and 80% at private colleges after adjusting for inflation.

One of the main reasons for the rise has ironically been government spending to increase affordability. This arises from several reasons. First, students receiving grants and loans have less reason to advocate for lower tuition since they are not paying their own way. Included in this principle is that colleges have little incentive to cut costs or create efficiencies. Second, principles of supply and demand dictate that as more people can afford to attend college, prices climb.  According to the theory, the market for education has an equilibrium point at which the number of people willing to pay to attend equals the amount of spots available. However, a subsidy, such as the Pell Grant program, shifts the demand upwards by distorting the price equilibrium and leading to increase tuition costs. Third, colleges are rational economic actors who incorporate any federal assistance increases into their tuition decisions. As former secretary of education William Bennet said, “[i]ncreases in financial aid have enabled colleges and universities to blithely raise their tuitions, confident that Federal loan subsidies will help cushion the increase.”Thus, the SAFRA bill does nothing to address the underlying problem of affordability and will force the government to spend increasing amounts on education entitlement programs.

Fourth, and most directly affecting the youth, SAFRA significantly expands the size of government while adding billions to the national debt. Despite proclamations for Democrats that SAFRA will create $80 billion dollars in savings and efficiencies, the numbers tell a different story:

  • The Congressional Budget Office admitted that the methodology used for the figure “does not include the cost to the government stemming from the risk that the cash flows may be less than projected.” Afterwards, the CBO re-estimated the potential savings down to $47 billion
  • Indexing Pell Grants to inflation lowers the CBO’s initial estimate by another $11.4 billion
  • According to CBO estimates the bill requires a $13.5 billion increase in new discretionary spending which is not counted in the savings
  • The government is claiming lower default rates than private lenders despite the fact that many of the new loans they will control are for community and two-year college students which have percentages of defaults
  • The estimate ignores the possibility of ballooning costs if the governmental bureaucracy proves less efficient in administration and collection that private lenders

Despite the dubious savings and numerous question marks, the government is set to start spending the $80 billion dollar figure immediately. In addition to entitlement programs such as early childhood education, green construction grants, and money to develop online curriculums for community colleges, the plan adds a budget busting $46 billion to enlarging Pell grants. What is being touted as savings is really tens of billions in new spending. What is being touted as efficiency will add $100 billion dollars per year in student lending to the national budget.

At a time when Americans believe the government is doing and spending too much, the unbridled take-over spree continues. Ultimately someone has to foot the bill for these huge expansions in the size and scope of government deficit spending. That someone is America’s youth. So while Democrats continue to laud SAFRA as “landmark investment in higher education” the real story is one of unprecedented debt being handed to the next generation. One can only pray that the Democrats lofty goals of increasing affordability and graduation rates comes to fruition…students are going to need the best jobs possible to be able to afford it.

- Brandon Greife, Political Director of the College Republican National Committee


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