Sunday, March 28, 2010

Obama Scores Big on Student Loan Reform

The Ramirez family could well serve as a case study in favor of higher education subsidies. My dad graduated from Northwestern on the GI Bill. He had five kids and they earned 10 post-secondary degrees, with huge assistance from the guaranteed student loan program and other federal financial aid programs from the Pre-Reagan era. We subsequently repaid these subsidies many times over through higher tax payments.

Empirical data shows these programs generated economic benefits far in excess of their costs, as I wrote about, here and elsewhere, in arguing for a vigorous re-ignition of federal subsidies for higher education. In my forthcoming book, Toward a More Perfect Capitalism, I extend this argument and propose a GI Bill for everyone that would greatly expand the current relatively modest GI Bill in scope and depth. (As an example, the government paid 100% of my dad's tuition at Northwestern plus $75 per month living expenses in 1951-53).

So, I confess that I felt real joy when I learned that Obama had somehow gotten historic student loan reform passed along with health care this past week. Obama will sign the bill Tuesday of next week, and so its details are still not clear. But the banks are out of the subsidized student loan business and that saves $60 billion in useless subsidies to the banking industry. The savings will be used to: i) expand Pell Grants for lower income students; ii) expand assistance to minority educational institutions; iii) expand aid to community colleges; iv) expand interest subsidies. In particular, the bill includes a provision for income-based repayment, whereby graduates repay no more than 10% of their income for loans originated after 2014.

Essentially we have socialized the risk of graduating without enough income to repay your loans and funded it by cutting subsidies to the banks. This removes an unnecessary risk to human capital formation and eliminates a near-predatory feature of higher education--the prospect of banks using enhanced collection efforts against borrowers who simply cannot repay.

This success will form a key part of the Democratic message this fall. But for minority students I think we need to send a clear message: whatever economic problems may exist when they graduate, financing their education makes sense because of the repayment cap of 10% income.

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