Sunday, October 13, 2013

Rather Than quibble Over Federal Student Loan Interest Rates, the Feds Should Get Out of the Student Loan Business

In response to my letter A Terrible Lesson, Maggie D'Aversa backed off from her position in Student Loans. In her latest letter, High Interest Loans, D'Aversa said:

I am not advocating that students or anyone else default on their loans, I agree with Laferrara (sic) that skipping on a loan is not a good idea. Rather, I am suggesting that we re-think where we place the high rates. 

She did, however, restate her question about the interest rates congress sets on student loans. I didn't think that was the main issue, but she apparently does. So, I submitted a letter to the Democrat in reply, but it was not published. So, I left these comments on the website:

I submitted a reply letter, but the Democrat is apparently not going to publish it. So,
for what it's worth, I thought I'd submit it here. 

You ask “why the federal government would choose to invest [make loans] in large financial institutions with very low interest rates . . . but not students” through equally low student loan ratesThe short answer is: All rates should be set by the market, rather than by a handful of politicians or Federal Reserve bureaucrats.

The essential issue is not interest rates, however, but the “investments” themselves. For the government to “invest” or make loans, whether to banks or students, it must first seize money—i.e., wealth—by force from productive private citizens who earned it. This is fundamentally wrong, because it violates the rights of productive citizens to spend and invest their own money by their own judgment. (In the case of banks, the fundamental question is: Should the government hold a monopoly on the monetary system? It should not, in my view. The Federal Reserve Bank should be abolished. That would end the"investment"—i.e., subsidy—of taxpayer wealth in the banks. But that is another issue.)

Federally funded or promoted loans, grants, and other subsidies to higher education—allegedly designed to make college “affordable”—have been instrumental in driving college costs to ever more unaffordable levels (up 1120% since 1978, 4 times the CPI). The result is the bizarre combination of a “student loan crisis” coupled with a skilled worker shortage. To reduce the rates on student loans to the scandalously minuscule level of the Federal Reserve discount rate will only encourage more easy-money borrowing, more upward pressure on tuitions, and a greater disconnect between students’ loan balances and career earning power.

Government involvement in the student loan market and tuition financing generally is both immoral and impractical, and should be phased out entirely. This would leave interest rates (and other loan terms) to be set by the voluntary, mutually beneficial contractual agreements between private lenders and students (and/or their parents)—i.e., the market. That’s as it should be.

Related Reading:

End, Don't Reduce, Federal Student Higher Education Funding

On "Nightmare" College Debt

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