Richard Vedder Thinks Student Loan Debtors Are Lucky Duckies

Are you an overpaid university administrator? A professor who works a couple dozen hours a week while receiving a six-figure salary for publishing unread journal articles? Feeling whispers of guilt as your students graduate into crippling debt and destitution? Fear no more, for Richard Vedder is here to put your conscience to rest. Turns out the real beneficiaries of our higher education financing policies are the students after all! Hooray!

The demonstrators say that selfish plutocrats are ruining our economy and creating an unjust society. Rather, a group of predominantly rather spoiled and coddled young persons, long favored and subsidized by the American taxpayer, are complaining that society has not given them enough — they want the taxpayer to foot the bill for their years of limited learning and heavy partying while in college. Hopefully, this burst of dimwittery should not pass muster even in our often dysfunctional Congress. -Richard Vedder, “Forgive Student Loans?” in the National Review.

There’s a lot to love in Vedder’s mispaupery, victim-blaming, and hatred of young people (older people have student loans too). My favorite part is that he seems to think the students–and not banks that received loan guarantees–lobbied for the policies that contributed to their “limited learning and heavy partying.”

A tribute to the versatile J.D. Reuben Bolling received from Harvard in the 80s.

My sarcasm aside, I agree with Vedder’s main criticisms of the student loan program: accrual accounting causes the government to underestimate market risk, student loans aren’t underwritten, they’ve contributed to tuition increases, and higher education is neither a right nor necessary for everyone. Beyond that, though, the rest of his article is his radical dogmatism dominating the second page, e.g. stimulating a depressed economy doesn’t work, Social Security is in peril, the national debt will kill us, and unfalsifiable bond vigilantes will backstab the U.S. Treasury.

Rather, now that student debt is crawling into mainstream politics, the public is tasting the ideological hostility it’ll witness. It will be all the bloodier because many of the people we’re talking about are young, and young people make excellent political scapegoats. Recognize that there are plenty of powerful Americans who couldn’t care less if the country mires in indefinite stagnation if it means we can use (or ignore) the levers of government to punish “bad people” who took on too much debt of whatever type. I lived in Japan ten to fifteen years after its real estate bubble burst. I’ve seen a society whipped by a government that opted for punitive stagnation, and now my life is like a Twilight Zone episode because it’s happening again.

In the United States, this decade will see a test between two political ideologies, one retributive and the other consequentialist. The only way forward is to do away with the former. Democracy means doing the most good for the most people, even if it means that people don’t have to pay back debt or that banks fail and academics lose their jobs. Yes, some people who made “bad choices” will come out ahead and others who “worked hard” won’t directly benefit, but don’t let appeals to “fairness” on the part of the “hard workers” fool you: Neither Vedder nor the National Review cares whether Americans suffer in permanent poverty due to policies sculpted to protect banks from taking risks.

Meanwhile, we need to recognize that the solution must be comprehensive. We cannot wipe out debt without preventing it from re-accumulating. If that means terminating the Direct Loan Program as Vedder advocates, fine. However, unlike Vedder, we can’t abandon existing debtors. The solution must come about either by restoring bankruptcy protections or canceling the debt. They lead to the same result, only one’s quicker and the other uses the judicial system, which I’m sure plenty of unemployed law school graduates will appreciate.

But Wait! There’s Good News!! Really! This made happy:

[The Fed] could move to deflate the debt that millions of households face from mortgages and student loans. This would mean following the path advocated by Ben Bernanke for Japan’s central bank when he was still a professor at Princeton; deliberately targeting a somewhat higher rate of inflation (e.g 4-6 percent). “David Brooks: Bard of the 1 Percent

This quote is the first time I’ve ever seen Dean Baker mention student loans. I credit Occupy Wall Street.

6 comments

  1. Dump the guaranteed federal direct loans program.

    Eliminate the non-discharge-ability of student loans, so if someone declares bankruptcy they can be rid of them.

    All student loans become private loans.

    Allow the market to dictate an interest rate based on supply and demand.

    Lender’s lend at their own risk and and deal with returns and losses through their risk adjusted interest rates.

    Hopefully this forces schools to do a better job of enforcing cost controls, and firing non-productive employees, because there will not be a blank check for funding.

    During the transitional interim, there will be a lot of students unable to attend college. That’s because it’s hard enough to get approved for any loan as it is right now. If you are an 18 year old with no cosigner, it’s perfectly conceivable that the loan prices at 15%-20% APR. That is IF you are approved. Lenders will become heavily skewed toward funding students with profitable majors, no one will lend to humanities majors.

    However, something magical happens as a student progresses through school. They become a lower credit risk, so each year after freshman year they should qualify for lower rates. By the time they finish school, they should be able to consolidate the loans at a rate more congruent with auto or home loans as they pay it off. If they do not finish, they might as well declare bankruptcy and start over, you know with that Starbucks job they would have gotten with the degree anyway, just without the same debt load.

    The other side of the coin will be all the frustration on lack of college access on part of the public. Maybe it’s better for them anyway.

    1. Decent idea. Having said that, I believe all education should be free. I think one of the reasons the free market ultimately fails with education is because 1) We have a corporatized welfare state and 2) people don’t treat education like a product.

  2. I agree with you KO except that I don’t think lenders would be able to come to agreement on how to measure profitable majors, and the universities would just work around the system.

    Business majors tend to have the biggest return for a lucky few. While something like social work, at least locally in my area, there are plenty of jobs for social work degrees at a decent salary, but nobody expects to make a lot of money with a social work degree. IT tends to be hot early on, but not so much over time. How far are lenders going to go back to measure a profitable major?

    As a STEM degree graduate working in a non-STEM field, there are a lot of myths floating around how people should just get a STEM degree. I do think that STEM should be considered a profitable major in general, but I am really sick and tired of people thinking STEM is a golden ticket for everyone. There are STEM graduates too at Occupy Wall Street for a reason.

    Also, STEM covers a wide range and STEM jobs are super specific, not just any STEM degree will do for a STEM job. Forest rangers and Ceramics Manufacturing Engineers have very different training and are not automatically interchangeable. Even within biotech, once a graduate goes down a certain path, it is so narrow, that it eliminates the change to get other types of biotech jobs in the future. While in theory, a good business manager can manage any type of business. Shortages in STEM jobs have more to do with the super specifics of STEM job requirements, not so much with the number of STEM graduates overall.

    Universities will just hide their humanities in the so-called profitable majors, add a comparative medieval medical literature degree to the nursing program or something like that. Or offer watered down degrees in their profitable majors. If they go off median instead of range, universities can really hide the super low paid graduates as long as the super low salaries are lower than the 50% median cut-off.

    There are so many ways to skew results for profitability of majors.

    1. Great Points Soapbox. Schools will let students into a “profitable” major to help get them approved for loan funding under the model I proposed. (Also, nice insight on STEM for workers being so hyper specialized in a field when suddenly the rug can get pulled out from them on employment. It’s a drawback in technical fields, super-steady work until the faucet is shut off)

      This is where decentralized banks, and micro lending can start to actually work. I suspect readers of this blog understand the impact micro lending has made in some 3rd world nations. It’s time for it to hit USA, but we got these pesky giant banks blocking the path by hiring all the talent.

      Right now private loan approvals are rather archaic. They are just starting to figure out how to account for credit risk based on major, school of attendance and grade level, but the algorithms are still too complex to scale on the national level, there is still simply too much variety in human capital potential and environments. Consequently,the heaviest weight is on the credit quality of the applicant, and for an 18-22 year old that comes down to the co-signer, typically the parent.

      Regional based micro-lending, combined with market determined rates can work. Providers would be the “boots on the ground” financiers making credit decisions based on the school, the economic environment, the major etc. They will be much more motivated to smell a rat, meaning they can actually check out the school, and see what programs they are actually running.

      “How far are lenders going to go back to measure a profitable major?” Lenders will have to pre-load the risks you speak of based on a combination of employment forecasts and current incomes within the professions. There will be students that are statistical outliers, like that humanities major that makes it huge with a book or music, but mostly the numbers are accurate for financing purposes. The increasing level of transparency for employment statistics combined with the technology to accurately track the data is slowly becoming a reality in higher ed. Relatively small local banks and credit unions can begin to add this service for their communities, but they must be given the right to charge market going rates and deny students that cannot get approved.

      It will never work as long as a guaranteed federal loan program remains in place.

  3. You have it right KO. Imagine if humanities faculty taught 40 hours per week? What would we do with the rest of the faculty? Pass an anti-collective bargaining law and an anti-tenure law and fire them. With respect to the public schools, Wisconsin did just that. Amen to Scott Walker.

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