RALEIGH — President candidate John Edwards, who occasionally moonlights as the senior U.S. senator from North Carolina, has come up with a new policy recommendation to distinguish himself from the Democratic pack.
It would expand the federal government’s role in financing higher education, muscling private lenders aside and increasing the student-loan default risk to taxpayers.
After some frantic deliberations and deep soul-searching, I’ve come to the reluctant conclusion that Edwards is wrong about this.
Speaking on the last day of a bus tour through the early-caucus state of Iowa, Edwards proposed that the federal government engage in direct lending to would-be college students instead of maintaining the current approach, which mostly uses federal dollars to subsidize loans extended at less-than-market cost by private banks. The senator claimed that direct lending, by eliminating the middleman, would save “billions of dollars” in administrative costs and foregone profits, allowing the loan program to be extended to more students.
This wasn’t the only way Edwards proposed to increase financial aid. He also wants to make taxpayers pay the full tuition of students who pass college-prep classes in high school and agree to join a work-study program in college. And he’d like to increase federal funding for Pell Grants to assist low-income students with college costs.
I’m not going to deny the political usefulness of these policy initiatives. Bill Clinton made much the same pitch — his administration experimented with direct lending and later introduced HOPE scholarships that paid the full tuition for some students — and probably won some votes. But Edwards’ proposal is wrongheaded on several levels.
First, direct lending has already been tried, and it was not a success. Late in the Clinton administration, the inspector general for the Department of Education released a report that clarified matters. It turned out that the federal government’s direct-lending portfolio cost $17 per student to administer, vs. $13 per student for the private-sector loans. High payouts and low loan payments resulted in a small net hit to the taxpayers, not the break-even situation that Clinton had promised.
Second, Edwards and others are focused on entirely the wrong issue with regarding to higher education finance. We shouldn’t be debating how best to subsidize student loans. We should be asking more fundamental questions. I’m not a fan of the private-sector version of federal student loans, either. There are perverse incentives and lots of defaults. In my view, the best federal policy towards student lending is not to be involved. If students and their families believe that getting a college education will be a good investment, then they should be willing and able to seek loans from banks and other institutions. There are also some very interesting proposals floating around to create equity markets for higher education. That is, investors would be able to buy shares in the future income of a class of prospective college students. Like all equity investment, it would be riskier than lending the money but offer higher potential returns. And it will also never happen on a large scale as long as easy, tax-funded federal loans are available.
This is a case where the market process is irreplaceable. If there is more demand for tuition financing than profit-seeking lenders and investors are willing to satisfy, then that should tell us something about their evaluation of the propensity of the students on the margin to finish college and secure gainful employment. Again, if college is such a great investment, why should ordinary families need a subsidy to take advantage of it? (Aid to the destitute is another matter, but a far less costly one.)
Lastly, whatever federal grants or loans are extended to students, they come on top of a much more massive taxpayer subsidy of most college education — in that the vast majority of students these days attend public universities where tuition pays only a small fraction of the real cost of the education received. The University of North Carolina system is among the most generous, with state taxpayers covering about three-quarters of the cost. Making tuition closer to free than it already is for these students would simply worsen the problems we already have with our low-tuition policy, including poor utilization of the UNC system, low graduation rates, and the redistribution of income from the relatively poor (non-college-going taxpayers) to the relatively wealthy.
Yes, I struggled with this one for a long time. But, ultimately, I have to conclude that the Edwards agenda for college funding is slightly problematic.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.