"That's why I'm absolutely committed to making sure that here, in America, nobody is denied a college education, nobody is denied a chance to pursue their dreams, nobody is denied a chance to make the most in life just because they can't afford it," Obama said. "We are a better county than that, and we need to act like it."
Hmmm....So what were the critical elements of the subprime crisis? A push on the part of the US government to increase home ownership, especially among segments of the population that had traditionally not owned houses or held mortgages. A huge subsidy from the government to those who borrowed to buy a home (through FannieMae and Freddie Mac and through home mortgage interest tax deductibility). An industry of subprime mortgage brokers who, fed by large up-front fees paid for mortgage origination, found millions of willing borrowers -- even though the brokers often knew that the loans were not appropriate and had little chance of being repaid, unless home prices continued their seeming relentless climb.
What do we have with education and student loans? Well, certainly the push for more to attend college (do we remember the studies showing that home ownership leads to all kinds of social good?). We have a subsidy, in the form of student loans -- and with the recent changes in the student loan program (packaged as part of the health reform bill !!), those loans are made and owned by the US government. In the subprime mortgage industry, FannieMae and FreddieMac decided to dramatically increase their purchase and repackaging of subprime mortgages in response to the Federal government's wishes: if your boss wants more home ownership, you better not stand in the way. It is still unclear how the new Federally owned and managed student loan program will work out. In the old days, private banks made student loans. Now it will all go through the Feds, with the taxpayer on the hook through our general taxes. If the Federal government wants more Americans to attend college, how do you expect the political appointees in charge of student loan origination to behave?
Last, we have a growing industry of what I will call subprime educational institutions, or degree mills. These institutions, whether for profit or nonprofit, will benefit from enrolling students, helping them navigate the Federal student loan process, and collecting tuition. The increase in demand for degrees is palpable, and supply will increase to meet the demand. These degree mills will lack significant "skin in the game" just like subprime mortgage brokers -- they will enroll students who have little likelihood of benefitting from the program or even graduating. But tuition is collected up front, and then it will be up to the Feds to collect on the student loans. Even some of the better colleges and educational institutions will be tempted by the increase in demand, and new technology -- online education -- makes it even easier to provide the coursework (for subprime mortgages, the technological innovation was in software to process mortgage applications).
Hell, we even have the equivalent of the credit rating agencies -- let's call them Educational Testing Service and ACT, Inc. What -- there are only two main educational testing services? That is even less than the three main credit rating agencies!
Oh, and the new student loan reform also gives subsidies to those student borrowers who take work in public service, and it caps payments at 10% of income.
All of this reform is promised to save us, the US taxpayers, lots of money.
I have a bridge in Brooklyn you might be interested in.
1 comment:
Very good post, I think the analogy between "subprime educational institutions" and the subprime mortgage crisis is very appropriate. In the post, you seemed to imply however that student loan reform bill (packaged as part of the health reform bill) increases the federal government subsidy towards student loans? But does it? As I understood it, before the bill, private lenders would orginate student loans that were guaranteed by the federal government. Now, the federal government just makes these loans directly. The middleman is eliminated. Is the subsidy really much different now? Am I missing something (other than the public service subsidies you mentioned)?
I'm not sure the best way to fix it, but a problem I do have with the federal student loan program is that the sizes of individual loans don't correspond to the costs of providing education. In the for-profit education sector, it's typical for 90% of tuition to come from federally guaranteed loans, but the cost of instruction is only a third of the tuition level (another third goes to advertising and another third is operating profit). Without access to federally guaranteed loans, for-profit education companies would assuredly have to lower tuition prices to a level closer to instructional costs (and much closer to the value provided by these degrees).
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