In an op-ed in Forbes.com yesterday tactfully entitled SAFRA Stinks, the CATO Institute’s Neal McCluskey argues against legislation that would end wasteful government subsidies to student loan companies, and use the $87 billion we will save to make college more affordable and accessible. Unfortunately, his argument is based almost entirely on his free market ideology, rather than an assessment of the current state of education and a desire to solve concrete problems.
Here are his major arguments and our response, one by one:
I. McCluskey oddly complains that too many people are seeking degrees, and so if the federal government cuts out the middleman and lends directly to students — instead of providing subsidies and loan guarantees to companies like Sallie Mae — then economic realities will not “constrain” student loans.
First of all, we are graduating too few college graduates, not too many. The Lumina foundation has estimated that the US will face a shortage of 16 million college educated workers by 2025. Those that do graduate are often saddled with student debt burdens that keep them from lower paying but vital career fields in which we face a shortage of workers, such as teaching or social work.
Second, he implies that he wants a student loan system that is unable to serve every student, like low income students, or students at certain schools. Or does he mean that the student loan system should collapse every time the market crashes, sending tens of thousands of students without degrees to compete in an already overburdened job market, rather than staying in school and building their skills for the future? Both of these options are recipes for disaster.
II. McCluskey argues that cutting wasteful subsidies to banks in the federal student loan programs will mean that banks will make fewer private loans to students. He doesn’t mention, however, that these private loans are generally very costly and risky for students because they have high and often variable interest rates and few borrower protections. One of the explicit goals of SAFRA is to give students better alternatives to these private student loans by using part of the $87 billion in savings to reform and expand the Perkins Loan program. These low cost federal loans will be better targeted to the students that need them.
III. He claims that the $87 billion in savings touted by “SAFRA supporters” are likely to be smaller than predicted. While the actual savings do depend on market conditions and other contingencies, the figure is the best guess of the non-partisan Congressional Budget Office, not a “back of the envelope” calculation by rabble-rousers who are not so good at math (like me).
IV. He argues that we should not tie the Pell grant to inflation because it will just encourage colleges to increase their prices. While rising tuition is certainly a concern, freezing student aid does not solve the problem, it merely freezes out low and middle income students and increases student debt. The maximum Pell grant award was frozen at $4,050 from 2003 until 2006, yet data from the College Board shows tuition and fees increased by 13% for public four year colleges during this time, after adjusting for inflation.
V. Finally, he argues that the $10 billion this bill would apply to reducing the deficit is inadequate. With America’s global leadership in education slipping and student debt levels skyrocketing, it is only prudent for the future of our economy to reinvest the vast majority of the savings this bill generates in education. If Congress wants to reduce the deficit, they might want to look at cutting weapons systems that the Pentagon does not event want (like the F-22 Raptor), and cutting back on subsidies to polluting industries (the oil industry receives as much as $40 billion a year from taxpayers).
*Cross-posted at Students over Banks