Monday, December 18, 2006

Credit controls, credit rationing, and financial aid 

We bemoaned on the air Saturday the decision of new Congressman Tim Walz to make the minimum wage his first piece of legislation. I argued that this harms the future lifetime incomes of young workers, particularly minority workers. (Michael's post on the item is here, and here is something I wrote last year.)

Not satisfied with that attempt to control prices and quantity at the same time, Rep. Walz and others now sally forth into student loans.
To help pay for dropping interest rates on student loans from 6.8 percent to 3.4 percent, many Democrats are promising to back pay-as-you-go budget rules that would force members of Congress to identify tax increases or spending cuts to fund any new spending.

Some Democrats, including Sen. Edward Kennedy of Massachusetts, the incoming chairman of the Senate education committee, also say the government could save money by making college loans directly, relying less on private lenders.

Minnesota Democratic Rep. Betty McCollum, a member of the House education committee, and whose district includes 32 higher education institutions, said that Congress should target subsidies to oil companies to pay for the plan.

The plan to lower interest rates that lenders can charge students is part of a broader Democratic effort to make it easier for students and parents to pay tuition by increasing Pell Grants from $4,050 to $5,100 per year and expanding tax credits, among other things.

...Democratic-elect Rep. Tim Walz of Minnesota, a teacher, said the plan to lower interest rates is a good step but only "one little piece of the puzzle."Since I was in school in '89, less than 20 years ago, 70 percent of college costs were paid by grants," Walz said. "Today 70 percent are paid by loans. So there's a broader issue here of how we finance public education."
There is no longer even the pretend-reasoning used in the 1970s of needing to lend money to students to get more people in science and engineering and math for national defense purposes. (Full disclosure: I received $4700 in such National Defense Student Loans in the 1970s with 3% interest. At the time they were created, 3% was not a bad rate, but by the time I was in college the rate was negative in real terms. P.S. The loan was all paid back.)

Ted Kennedy's point is actually the most valid of the bunch: If the government can borrow funds to lend to students at a lower rate than private banks can (even with the backing of Sallie Mae) there might be some justification. But to flat-out guarantee a rate below the rate we receive from the government when it borrows money from us certainly means that Congress wishes to subsidize students. It also means that such loans will be allocated by something other than price. Credit to college students will be rationed by government rules rather than the market.

Betty McCollum illustrates what I said on the air Saturday: If she wanted to give money to students through a tax increase there would be accountability, but she instead chooses the close-a-loophole dodge. By what principle does one tax oil companies to give money to students?