Michael Kinsley analyzes the federal student loan program and forgets that more than two scenarios are possible.
Here’s how the program works: Banks and other private companies lend money to students. The federal government pays part or all of the interest — currently 7 or 8 percent. The government also guarantees the loans.
What is wrong with this picture? Well, the government itself borrows the odd nickel to finance the national debt. This borrowing, obviously, is also guaranteed by the government. For that reason, it carries an interest rate of only 3 or 4 percent. If the government can borrow money at 3 or 4 percent, why should it pay 7 or 8 percent for the privilege of guaranteeing loans to someone else? Wouldn’t it make more sense for the government to lend the money itself?
The third possibility is that the government could remove itself from student loans entirely, which is the only legitimate position for it to take. Let the market develop solutions, including appropriate insurance mechanisms to pool the risk of adults without a credit history borrowing money for an activity that can’t be securitized. Let’s find out that it can’t or won’t be provided by the private market before we decide it must be provided by the government.
But there’s a bigger flaw here. If the government begins taking on more and more borrowing responsibility, it will not be able to continue at its rates. At some point that guarantee becomes worthless. Or more likely, people realize that the guarantee isn’t as guaranteed as it’s been sold.
Think about the IOU issued for social security. Carry the logic further, as Mr. Kinsley wishes us to do here, into trusting the government to provide all sorts of services. At what point do we reach the threshold where there aren’t enough people in private industry to create sufficient new wealth for the government to redirect this wealth into “guaranteed” services, via taxes? At some point, money becomes worthless and life becomes nationalized. That attractive 3 or 4 percent interest rate will mean nothing.
I won’t pretend to know what that threshold is. I think we’re closer than we collectively believe. I’d suggest that people like Mr. Kinsley think we’re further away, but I fear that’s giving them too much credit. I don’t think they believe a threshold exists, much less where we are in relation to it. That’s dangerous.
Mr. Kinsley demonstrates his contempt for individual preferences in his conclusion:
… the “one-size-fits-all direct loan program.” This would be no bad thing, but it doesn’t seem to have been the case. I’m not sure what “one size fits all” means here, but if it refers to the interest rate that students and their families have to pay, it’s true that there is only one rate in the government program, compared with many in the private one — all of them higher, but maybe there are people for whom the variety is worth it.
Who doesn’t want a free lunch, right? But let me make an effort.
The variety is worth it for me, since I am not in the process of taking out student loans, nor do I expect to do so in the future. A variety of interest rates, even if they’re higher, would be preferable. That way he who engages in the risk takes on the cost of the risk. Why should I help pay for every college student’s default risk through my taxes, which is how that interest subsidy is funded now, and would be funded under Mr. Kinsley’s plan?
As a matter of disclosure, I have an existing student loan from my college years that was and is subject to government guarantees. I would not have used the system as it was/is, if I’d had a choice. As I think I’ve written, a significant portion of my undergraduate debt was in my mother’s name. That’s just as irrational. The entire student loan situation in the United States relies on the faulty notion that college students are irresponsible children. Worse, we’ve added lending institutions and the American taxpayer to this assumption. Mr. Kinsley’s idea would deepen this idiocy.