Obama’s Loan Plan – Scary Stuff

Like Caesar’s Gaul, President Obama’s plan for higher education is divided into three parts:

1) Every American should have postsecondary educational training, and within a few years we should again lead the world in the proportion of young graduates with bachelor’s degrees;

2) Federal financial assistance to pay for college should become an entitlement like Social Security or Medicare, available to all in need;

3) The private provision of loans to students should end and the Federal Government should become the provider of student loans.

The American higher education establishment has mostly endorsed this sweeping proposal. As is so often the case, they are wrong. On every count, this proposal is an Obamination – a perverse set of policies that will raise costs to taxpayers and, surprisingly, also to many college students and families.

Every American Should Go to College

The President believes too few persons go to college. At least a compelling a case can be made that, in reality, too many attend. More than 40 percent of those currently enrolled do not graduate within traditional time frames (three years for community college, six years for baccalaureate programs). Contrary to the President’s assertion,, financial problems are not the dominant reason for this attrition. Many persons are intellectually, emotionally or temperamentally ill-equipped for college work. Increasing the pool of enrollees will mean increasing the proportion of students with poor high school records and/or with very low cognitive abilities. Does the President seriously believe the teen-age children my wife helps who are developmentally disabled but cannot tell time or read should truly be college students some day? More generally, what about the 30 percent or so of kids that fail to graduate from high school?

The only way to quickly increase college attendance without worsening an already horrendous attrition problem is by vastly lowering standards and student expectations. In other words, make American colleges more like high school. Already, Europeans can graduate from college in far less time than Americans, on average (indeed, the three year bachelor’s degree is the norm under the Bologna process governing European Union higher education policies), precisely because they come to college better prepared. The President does not address this problem at all, perhaps afraid of criticizing his teacher union allies who believe, with some reason, that they control primary and secondary education.

But even if somehow this problem went away, who is going to hire all the college graduates? There is growing evidence that we may be overinvested in higher education – more and more college graduates are taking relatively low skilled jobs unrelated to their college training -e.g., 12 percent of mail carriers now have a college degree, and a five digit number of beauticians have post-graduate degrees. The college/high school earnings differential among women is smaller today than 20 years ago.

Federal Financial Aid As An Entitlement

The President wants to convert Pell Grants, that now go to roughly 30 percent of college baccalaureate students, into an entitlement, theoretically available to all but, almost certainly, not available to upper-middle income individuals and above.. My colleague Andrew Gillen has shown that federal student loans, generally have the impact of raising tuition charges – demand for college rises relative to supply. Thus it is likely that the president’s proposal will worsen the tuition price explosion. The administration’s answer to that is to tie provision of funds to college performance as measured by indicators like graduation rates. That, in turn, either will lead to a lowering in academic quality (as grade inflation, already a scandal, worsens), or, alternatively, to a tightening of standards as schools try to minimize potential dropouts by reducing the proportion of students who have a high probability of failure, disproportionately low income individuals, minorities, and immigrants. In other words, the policy might inadvertently hurt those that it is most designed to help.

Moreover, how is all of this going to be financed? Using honest (e.g., non-governmental) accounting, the unfunded liabilities of the nation from Medicare and Social Security now approximate 50 trillion dollars – the entire value of our nation’s stock of physical capital. The President wants to add to that liability. It is the height of fiscal irresponsibility, perhaps not surprising for an Administration that the Congressional Budget Office tells us is going to give us nine trillion dollars in budget deficits (more debt) over the next decade. This is an immoral burden on non-voting members of future generations that will bear the burden of the presidential/congressional irresponsible conduct long after Obama et al have retired from the political scene.

Ending Private Student Loans

I am saving the worst for last. The president’s overtly socialist tendencies are manifest – look at what has happened to Freddie Mac, Fannie Mae, AIG, Citigroup (over 30 percent government owned), Chrysler, GM, etc (admittedly, George Bush is partly guilty for this as well). The apparent reluctance to let banks retire their government owned preferred stock and accompanying common stock warrants is further evidence of the Fed’s desire to control private forms of resource allocation that have worked well for literally centuries. The President does not like or trust the private sector, one reason why the Dow-Jones Industrial Average at this writing is 1,200 points below what it was on Election Day.

Economists of almost every persuasion agree monopolies are bad. Do we want to turn over the provision of a majority of the financial assistance of college students to a monopoly – indeed, the folks that run the Post Office? At least the Post Office has competition – email, text messaging, Federal Express, United Parcel Service, etc. This is a genuinely awful idea. Moreover, again, there is the financial issue. Who is going to finance all these loans? The federal government? It will turn around and borrow the money, often from participants in volatile international markets.

Enough is enough. I have made my point. Far from insuring the achievement of the American Dream, the Obama proposals will cause angst and frustration among those who try college and fail, will raise costs to middle class American college students (via higher tuition charges) who will be the backbone of the nation’s future, and will further compromise the fiscal integrity and financial leadership of our nation.


  • Richard Vedder

    Richard Vedder is Distinguished Professor of Economics Emeritus at Ohio University, a Senior Fellow at the Independent Institute, and a board member of the National Association of Scholars.

11 thoughts on “Obama’s Loan Plan – Scary Stuff

  1. I advocate for respect and choice for all of the above and any others who are having their rights nibbled (or gulped whole) by the extreme religious reich.

  2. I suggested she apply because she is well thought of at the company, the background requirements are more to weed out those truly not qualified and ultimately they will do what they want to do. With great reluctance because of the requirements (and she thinks the rules are the rules), she did.

  3. Kudos. unfortunately, procreation cant be removed from the equation. If there are special rights and privilages (loopholes) its to allow people to raise/provide for a family despite a government thats taking too much. If the government was anywhere close to its Constitutionally constrained size, this wouldnt be an argument and true equality would reign.

  4. LMAO! The entire country including deep blue Massachusetts is in full revolt over the fascist left trying to force every citizen to purchase insurance at the point of a gun; and this hapless dolt, who is of the very same ilk, is so clueless he cant even see the Swastica staring back at him in his own mirror.

  5. In 2008 I was prosecuted by the Central Council of Jews in Germany. Who stood by me and offered me moral support? A German citizen? An Englishman? An American Christian? No! A French Jew who insisted that the so-called “Holocaust” was nothing more than a lie designed to extort from Europeans vast sums of taxpayers’ cash in memorial of a “crime” that simply did not happen.

  6. Query whether Prof. Vedder considered another issue raised by this proposal to eliminate private lender participation in federal loans.
    It’s clear, and confirmed by the Administration’s own admission, that the proposal is motivated by the Administration’s desire to keep the profits generated by the government’s low cost of funds. 90-day Treasury bills are now trading at about 25 bps. It realized it could keep the difference between the 6.8% borrower rate, minus administrative expenses (which they’re not required to count all of, under federal law).
    That is to say, the government is competing with the private sector, not because it has a core competency in lending, but because it’s capital costs are lower.
    But in what credit market aren’t the government’s costs lower?

  7. This is the first I have been to this weblog (once again, I’ve been out-of-the-loop, Blogosphere-wise), as so many other things have come up); but thank you so much for providing another resource, for those in academia, who are going against the prevailing “wisdom” in the Ivory Tower.
    I see that this is a project of the Manhattan Institute; that is a fine organization, which I know that Heather MacDonald and the Rev. Floyd Flake (D-NY) are both involved with.
    Keep up the great work!!

  8. Good analysis by Professor Vedder. It’s becoming increasingly obvious that the policy moves of the Obama administration are mostly designed with the care and feeding of special interest groups vital to the Democratic Party in mind. Putting more academically marginal students through college does nothing for our economic productivity, but it does funnel more resources into the education sector (which of course loves the Democrats) and it puts more people within the ambit of educators who are far more likely to extol the statist path the country is on than to criticize it.

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