Over at the Brookings Institution, University of Michigan professor Susan Dynarski writes that the GOP platform on higher education fails to adhere to the party’s ostensible free-market principles. At issue is the platform’s language on student loans, which states that “private sector participation in student financing should be restored.”
“The good old days of “private” student loans, to which the GOP platform implies an intended return, lacked the main benefits of privatization.”
Although it sounds free-market, the key word in the sentence is “restored.” Prior to our current student loan system, in which the federal government lends directly to students, there was no true free market for financing higher education. Instead, the government guaranteed student loans made by the private sector. It also set interest rates and borrowing limits.
The good old days of “private” student loans, to which the GOP platform implies an intended return, lacked the main benefits of privatization. Taxpayers bore all the risk, so lenders had no incentive to weed out poor-quality colleges. Predetermined interest rates eliminated any possibility of competition based on price. These shortcomings are part of the current, government-originated student loan framework, but they are hardly unique to it. Reverting to the old system would change little but the optics.
Dynarski rightly calls out the inconsistency here—Republicans want privatization in name but not in practice. However, her next assertion is that a private student loan market without government guarantees could never work. Not so fast.
The case that private student lending will face insurmountable market failures rests on the presumption that student loans, unlike car loans or home loans, would be unsecured. This is because people cannot put up their degrees as collateral the way one can put up physical property. Privatization critics claim that lenders will thus charge usurious interest rates, which will discourage many prospective students from borrowing and lead to underinvestment in education. As Dynarski mentions, the free-market economist Milton Friedman discussed this in a 1955 essay.
However, Friedman went on to say that the answer to such concerns is for students to put up their own income as collateral—student equity, not student debt. Under such a scheme...
Read the entire piece here on Forbes
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Preston Cooper is a policy analyst at the Manhattan Institute's Economics21. Follow him on Twitter here.
This piece originally appeared in Forbes