Wednesday, November 01, 2006

The New York Times on College Aid

A recent New York Times editorial shows, once again, that the NYT editors have a hard time thinking straight. Here are some excerpts from the editorial, “College Aid Cutbacks” along with my comments.

Government loans also have not kept pace with rising costs. Subsidized loans accounted for only 55 percent of student borrowing in the most recent academic year, down from 69 percent 10 years earlier.

Why should student loans be subsidized at all? If there is a reason to subsidize them, what is the rational for determining the right subsidy? Assuming it is true that “Subsidized loans accounted for only 55 percent of student borrowing in the most recent academic year” is “down from 69% 10 years ago”, does that imply that subsidized loans are down or down per capita? The NYT editors missed all these points and they are the crux of the issue.

Bush administration officials have said repeatedly that the solution to the nation’s growing income inequality is more education. That’s a gross oversimplification, but if they really believed it — and cared about a remedy — would federal college aid be declining?

Without knowing the right level of federal college aid, we cannot know if a decline is good or bad.

As things stand, privatization of college lending is the administration goal that is being advanced. As government aid has declined, loans from banks and other private lenders have soared, climbing to 20 percent of all education borrowing last year, up from 12 percent five years earlier.

This implies nothing about whether students are obtaining the loans they need to attend college or not?

Should all these students be attending college?

The result is towering debt. The same bachelor’s degree will cost a student borrower far more than a student who can afford to pay.

The student borrower pays interest on his loan. The student who pays cash loses the interest he could have earned on his money. The latter’s loss is at the market interest rate, which is higher than that of a subsidized student loan. In this case, the student borrower has a lower (present value) cost than the student who can afford to pay. If the student borrower pays the market interest rate, then there is not much difference between the borrower’s (present value) cost and the cost for the student who can afford to pay.

That’s not a path to greater equality.

I will believe that the NYT editors really want equality when they stop wearing Rolex’s, stop driving expensive cars, and donate the difference between their income and the average income to charity.

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