28 November 2017

On the Student Loan Front

How many times have I posted something about student loans? I don't care to count but most recently here and one from 2012 on which I wish to elaborate here. Way back then I observed:
You may have wondered why student loans aren't priced according to the economic risk of the student's proposed course of study. Or maybe not. As I posted here and here, student loans are part of system subsidized by the federal government whose purpose seems less to provide meaningful education than to enable providers of so-called "education" to prosper.
For a good policy suggestion go to this piece by Nick Phillips at The American Conservative. Phillips acknowledges that there's little constitutional warrant for a system of federally-insured student loans but he's realistic enough to recognize such a widely-used middle-class entitlement ain't goin' away. So instead of arguing for a libertarian pipe dream, Phillips writes:
The policy solution: link the cost of borrowing to the riskiness of the underlying asset. The interest rate for federal loans should rise or fall depending on the default risk of the student’s degree program (that is, the default rate of graduates who attended the same institution and majored in the same subject as the borrower). By porting private market principles into the federal loan system, we can ensure that student borrowers are incentivized to pursue degrees that maximize their chances of paying off their debt.
Phillips acknowledges that there is a downside to pricing student loans according to risk: "Degree programs in the humanities and fine arts will likely skew wealthy, because low-income borrowers will not want to pay the relatively higher borrowing costs that such programs carry." In other words, risk-pricing will serve to enhance the current STEM mania. Phillips response is to compare relative evils: "the current system is unfair, so the relevant inquiry is which creates the greater injustice." Since most policy choices are between relative goods (or lesser bads), then why not give student loan risk-pricing a chance?

Our Republican-controlled federal government, however, is unlike to take up anything like Philips's useful suggestion. After all, rather than seeking the common good, they're more interested in rewarding their corporate donor base with sugar plum tax cuts. And notwithstanding the brake on the economy to which the current student loan situation contributes, most Republican voters are more excited to elect men of questionable moral character come hell or high water than to solve practical problems.

Addendum: Thanks to a sharp-eyed reader (I'm talking about you, Matthew Bruckner), I can send my readers to article making the argument for risk-based pricing of student loans in academic detail: Michael Simkovic, Risk-Based Student Loans, 70 Wash. & Lee L. Rev. 257 (2013). Download it here.


  1. You've seen this? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1941070

  2. No, I hadn't but thanks for the link to to "Risk-Based Student Loans'.