Saturday, March 27, 2010

A Real Student Loan Reform Solution

As Congress passed student loan reform yesterday we again saw the Democrats favorite solution to a growing problem of education costs - a government takeover of the market for educational cost lending. Based on their solution to healthcare it seemed only natural and we're seeing the same leanings on the home foreclosure front with a new program taking government debt funded dollars and assisting banks and then trying to have them pass the new loans off to FHA, surprise, surprise - a government program. I won't mention that most of these loans are Fannie or Freddie or Ginnie loans already.

Unfortunately, turning every problem into a future government obligation, which will invariably become underfunded like medicare or social security, is not a long term solution. This student loan program will end up costing the very graduates it is purporting to help through higher taxes and lower benefits and inflation adgusted earnings in the future.

A real solution to this problem and others is not to use the United States lower current (which will go up if we continue to borrow at these rates) cost of borrowing funds to show savings, but to get the incentives right between all the parties relating to education to make a private solution possible and successful. I doubt the Democrats even know who the parties are, but I'll tell you here - the student, the education institution, future employer, the taxpayer.

Right now, we're giving every incentive to the education institution to continue to raise the cost of education, we're giving the taxpayer a big future obligation and risk. If instead of government issuing the loans at below market interest rates, we gave employers tax credits for paying student loan payments of graduated students we'd help students cover the cost of their education without putting a burden on the taxpayer or saddle them with the risk of the student defaulting on the loans.

Some say that its two sides of the same coin - issue debt or collect less taxes from employers. But here is the main difference - one is promising ourselves more costs through debt obligations while the other forces us to make do with less in the way of government spending limiting our future debt. In addition, the incentive for graduates would be swung toward getting a job as soon as possible, the employer gets a better deal on hiring talent and a lower tax bill therefore spurring hiring (a needed thing these days). The risk to taxpayers is removed, the educational institution gets paid, private lenders re-enter the market with lower borrowing costs because they have a higher chance of being repayed once the student becomes employed and through the incentive more students are attracted toward marketable degrees for which they can get hired by an employer after graduation and have their loan payments covered. Higher employment levels and more higher education level/white collar jobs means higher wages which means higher tax revenues expanding the tax base, raising more revenue for the government to pay back the trillions it already owes the rest of the world.

While there are obviously details and levels that I haven't set here such as what amount of debt repayments, what type of tax credits, etc - the point is that instead of taking the easy way and saying "uncle sam" will pay for it and throwing tax dollars at it - you can devise programs which create incentives for private industry to work out a solution at little no cost to the government.

We need more of this type of thinking in Congress and from the White House. Maybe if someone from industry actually held a high ranking post in the White House, we'd see more things like this instead of making more and bigger debt bombs for future generations. The bill is coming due soon and the piper will need to be paid.