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Money for nothing

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This story in the Economist does a good job of capturing the broad outlines of a crisis that’s been building in higher education for a generation now: that is, ever since colleges and universities realized they could expand their financial operations via tuition paid by federally-guaranteed loans, that could be issued with little or no consideration given to whether those who took out the loans would be able to pay them back.

The government employs all sorts of accounting strategies to keep the real default rate on student loans looking lower than it actually is, including generous deferment options, very long delinquency periods before loans are declared in default, and Income-Based Repayment, which for most people who employ it is likely to result in default in all but name. Even so, with the current putative delinquency rate already over 10%, and sure to climb much higher as various deferment options stretching back to 2008 expire, this trillion-dollar mountain of debt is becoming a front-burner political issue (the Occupy Wall Street protests are surely playing a role in the issue’s sudden prominence).

Last week the Obama administration announced it was moving up various changes in IBR previously slated to take effect in 2014 to next year (the most significant is that the period of government-financed peonage will be reduced from 25 to 20 years). And Ron Paul is highlighting the extent to which funding higher education through student loans ensures massive inefficiencies in the market for that service.

Now obviously it goes without saying that Ron Paul is crazy. (Interestingly, people who do any serious questioning of a status quo from which the economic elites benefit always turn out to be “crazy.”). But consider the effect that limiting federal educational loans to a maximum of say $10,000 per year for tuition would have on, to pick an example at random, law school tuition. Is it possible to provide a “quality” legal education for $10,000 per year?

Given that 30 years ago many private law schools were charging no more than this in 2011 dollars doing so at present would not seem to require any innovations on par with the invention of the microprocessor or the 99-cent gordita. Indeed, given the staggering advances in information technology over the last 30 years, it ought to be far cheaper to provide the same quality of legal education that was being provided for $10,000 in 1981 for much less, or to provide a higher quality of education for the same price law degrees were being sold at the dawn of the Age of Reagan.

Anyway, if public money for tuition were limited to $10,000 per year, does anyone seriously doubt that dozens and dozens of law schools would soon discover that it was possible to operate with precisely that annual tuition? Instead, these schools are charging four and five times that, for the simple reason that they’re being allowed to, courtesy of the U.S. taxpayer. (Another outcome of this change is that USNWR would suddenly discover that it doesn’t make sense to reward law schools for achieving the maximum possible financial inefficiency, which they do now by using expenditure per student as a proxy for quality).

Indeed, it would make far more sense, in terms of both financial efficiency and economic justice, to simply give law students $10,000 per year of government money to spend on their education, than it does to allow them to borrow $70,000 per year, as many now do, in high interest non-dischargeable government loans.

Again, law school costs as much as it does only because of a system of debt financing that allows those costs to be decoupled almost completely from any rational calculation regarding its benefits. It’s true that law students borrow absurd amounts of money to go to law school because law schools publish phony placement and salary statistics that make those borrowing decisions seem far less reckless than they are. But we shouldn’t underestimate the extent to which the government’s remarkable willingness to allow law schools to charge literally whatever they want at the (eventual) expense of the American taxpayer also plays a role in signaling to those students that borrowing $200,000 in high-interest non-dischargeable debt to go to a non-elite law school is not as insane a decision as it would otherwise appear to be.

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