Regarding college loans, it’s time to let the free market take over. We should kick the federal government out of the student loan market because government cannot control the cost of college.

Not only is government failing to keep the cost of higher education from rising, government is, in part, responsible for this increasing cost.

Additionally, the government, in part, causes the unemployment that recent college graduates experience.

Here are the figures: Student-loan debt, which rivaled and then surpassed credit-card debt, is projected to reach $1 trillion in 2012; $848 billion of this debt corresponds to federal student loans, according to the Federal Reserve Bank of New York.

Despite consistent, yearly federal lending increases, tuition price inflation outpaced that of consumer goods, housing, energy and even health care since 1990, according to Moody’s Analytics.

Moreover, college debt will surpass $1 trillion in 2012, and the percentage of college borrowers who default on their loans is projected to increase, according to Moody’s Analytics.

Finally, approximately 53 percent of bachelor’s degree holders under the age of 25 are unemployed or underemployed, an 11-year high, the Associated Press reported.

Despite continuously increasing federal student aid during the last decade, the cost of college is increasing, we hold more debt, we are more likely to default and we are less likely to be employed.

The numbers explicitly show government has failed to control the price of college.

Government aid, by purpose and effect, enables people to pay more for some good or service. Because federal student aid empowers students to pay more than they otherwise could for college, federal college aid empowers colleges to raise prices.

Regarding loans, the federal government lends to student borrowers on the cheap, but not for free. Many choose degrees without considering the demands of the market because getting a federal student loan does not depend on the lender or the borrower making these considerations.

As a result, many graduate college with degrees that do not match the needs of the market. For this reason, college-graduate unemployment is high, debt is massive, and accelerating college loan defaults are expected.

For sure, government has made borrowing easy, yet in the process, it has increased the cost of college, increased the amount we must borrow to attend, but failed to make anyone’s degree more valuable.

In aggregate, government cannot increase the value of our degrees, but over time, the free market can.

Unlike government, banks must make a profit. Banks must consider the risk of loss due to nonrepayment. In student lending, risk depends on employability, which depends primarily on a student borrower’s ability and chosen major.

To minimize risk, banks would set individual borrower’s college loan rates based on the borrower’s ability and labor market demand for the borrower’s chosen major. College graduate unemployment would fall because student borrowers, seeking lower rates, would opt for degrees the job market demands.

Some might say this limits choice of employment. But, the same limits on employment choice exist anyway.

The difference is with government involvement, people hit these job-choice limits only after accumulating massive student debt. Without government involvement there would be fewer degree holders with debt and more with jobs because of risk assessment.

Michael Stikkel is a junior computer engineering major. His column appears weekly. He can be reached at mcstikke@syr.edu.

 

Published on October 24, 2012 at 2:59 am