Clarity on student loans.

Let me start by saying I thoroughly enjoyed Barack Obama’s visit to UNC, and all of the ancillary benefits of that (Jimmy Fallon). But let us be clear that this was a political trip in which the president pandered on an issue that appears relevant to young people.

I felt like most of my peers understood that, but all of a sudden it appears that either 1) I was wrong 2) they forgot they were being shallowly pandered to or 3) they don’t understand the implications of that pandering. I’m leaning toward 3. Clearly, one can be pandered do about a substantively good public policy — but I’m willing to bet it’s rare. In any event, it’s not the case with respect to student loans.

But the will to publicity is just too great, as evidenced by this, in which our student body president becomes a shill for the Obama reelection campaign.

What are to be the goals of education spending policy? Increasing access? Affordability for the least well off?

Changing the student loan interest rate does almost none of this.

Will Willkinson notes that most of the beneficiaries are those who have already graduated, many of whom have earned their ticket to upper-middle classdom, or are at least well along that trajectory. In any event, as Justin Wolfers has noted, and which Wilkinson also mentions, we can do a lot better by taking the money and putting it elsewhere.

What would be better? Almost anything. Taking the $6 billion dollars it would cost to keep the rate down for one year and applying it to scholarships for poor students would be one way. One would want to influence people on the margin, so a program that is completely targeted at entrants who are on the financial fence would be far better. Also, poor people spend money we give them. An investment banker clearing six figures but with student debt is much more likely to pocket his reduced interest expense. So again, reducing rates across the board is sub-optimal.

It’s been said that this isn’t an issue because it costs pretty much nothing for the government to borrow, so even lending at just a few percent can allow them to make a profit. Jason Delisle, writing for The Agenda, gives us reason to believe it’s not so simple.

If you subscribe to the argument that we should measure (i.e. discount) the cost of government loans based solely on what the government pays to finance them with Treasury debt, you effectively treat the equity risk taxpayers bear in making the loans as costless. Or more aptly, you exclude it. You treat average expected losses as if they are certain to occur and assume the government won’t need to call on taxpayers to make up for unexpected losses. That is more or less the approach written into a 1990 accounting law that today still binds federal budget analysts at the Congressional Budget Office and every federal agency.

This is because taxpayers are on the hook for all unexpected losses. That makes them equity investors in the program, which makes them assume costly equity risk that isn’t accounted for by the government. According to Delisle, we spend more on the student loan program than on guaranteeing home mortgages or mortgage-backed securities.

Of course, the president isn’t dumb. I’m dumb. Why would he be campaigning on this issue at college campuses if it wasn’t a winning stance to woo young voters, even those who are supposed to be intelligent and inquiring? It is clear that no interest group is immune from rent-seeking. So to that end, kudos to our student body president for going out and advocating for extracting taxpayer rents for subsidizing the future good living of students who incur debt to come here.


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