Give It the Old College Try

Richard Vedder

Author's note: This blog was written prior to Mitt Rommey announcing support for extending the low interest student loans discussed below. My criticism of that stand thus extends to both presidential candidates.

Even his critics will acknowledge that Barack Obama is a shrewd politician with a pretty good ability to measure the nation’s mood. Unfortunately for him, the nation’s mood is not particularly good, and as an incumbent seeking reelection, his poll numbers are consequently not very robust. Moreover, he lacks the warmth of personality of say, a Ronald Reagan or a Bill Clinton. Despite costly efforts at economic stimulus, the economy is performing, at best, in a mediocre fashion. His signature legislative victory, Obamacare, is not liked by a clear majority of likely voters and may soon face the humiliation of being found unconstitutional. The public and investors are nervous about other policies, notably the huge federal-budget deficit. Bashing the rich and trying to raise their taxes is not resonating sufficiently well for the president, and exclusive emphasis on that issue makes the president look, well, not presidential. The high price of gas has not helped Obama either.

So what to do? The president thinks he needs to rekindle the youthful enthusiasm for him that helped him hugely win election in 2008. How to do that? Become a champion of students and declare war on rising college costs! Hence President Obama is traveling this week to three states he won in 2008 but are viewed as now up for grabs—North Carolina, Iowa, and Colorado, in each case to speak at the flagship public university. I think the president’s political decision to stress this issue is shrewd, and the GOP failure to talk much about it is a huge political mistake for them.

Yet, lest I seem too warm and fuzzy about Obama, I must add that I feel his ideas for dealing with the problem are largely disastrous, in keeping with the Democratic Party’s long record of enacting entitlement programs which, because of the Law of Unintended Consequences, often lead to results quite different than intended. Specifically, what will the president call for this week? If previous pronouncements are any guide, he above all wants interest rates on student loans to remain at 3.4 percent, despite a law (passed by a Democrat-controlled Congress) that calls for them to mostly rise to 6.8 percent in two months. I should note that this legislation will benefit current students relatively little. Loans are repaid after college, and the average age of student debt holders is presently around 33, and surprising amounts of loans are owed by persons in their forties or even fifties. Given high default rates (correctly measured) on loans, it is fair to say that interest rates on these loans in a competitive loan market would probably be much higher than 6.8 percent, so current law will merely reduce a huge interest-rate subsidy to a somewhat smaller one.

My beef is that we should NOT be engaging in massive programs to entice people into college, and certainly not give windfalls to those who, in many cases, left school a decade or more ago. A recent AP story says 50 percent of recent college graduates are either unemployed or, more often, underemployed, working as baristas, bartenders, taxi drivers, etc. The number of college graduates is too great even in a robust job market; using public resources to send taxi drivers and bartenders to school for 16 as opposed to 12 years is not an optimal use of resources in a time of trillion-dollar budget deficits.

The president will call, undoubtedly, for more Pell Grant money. There are dimensions of the Pell Grant program I like, but I fear it is has been vastly overextended to persons who are not poor in any traditional sense, and to those for whom the probability of graduating is low. It would be a better program if funds were directed, voucher-style, to students directly and its size needs to be reduced, not enhanced.

The president will probably renew his call for quasi-tuition price controls, threatening schools with retribution if they raise tuition excessively. While the sentiment here is good, this is another example of encroaching federal control over higher education, which, in my judgment, is decidedly bad. The great strength in American higher education precisely lies in its diversity. If the president wants to make colleges more price (tuition) sensitive, reduce federal student aid. In the final analysis, Bill Bennett was and is right: the federal student-assistance programs have largely been dissipated by more aggressive tuition raising than otherwise be the case. It is not an income transfer from taxpayers to students as much as from taxpayers to university employees (creating more of them, lowering productivity in the process).

I hope the president promotes one thing he brought up in the State of the Union: we should have data on the earnings of postgraduates of schools. The IRS and Social Security have the data—they just need to be untapped. Adroit public disclosure of earnings of college graduates could have a revolutionary impact on higher education.

Finally, I predict the President will NOT say that American universities are teaching little, expecting too little of their students, and becoming more and more a cross between hedonistic finishing schools and country clubs. That probably does not win votes (and thus will not be mentioned), but it is true and needs to be said.

This article originally appeared on the Chronicle of Higher Education's Innovations blog on April 23, 2012.

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