Until recently, things were looking bad for students trying to find money for college. These days, credit is notoriously hard to come by, and the market for student loans is no exception. Many companies were thinking of getting out of the market.
Last week, however, Secretary of Education Margaret Spellings outlined an industry-rescue plan to encourage lenders to stay in the program. The bill, recently approved in the Senate, allows the Secretary of Education to purchase student loans issued by companies. This guarantees loans in order to provide more capital for people to go to college. Since this announcement was made, many lenders have decided to return to the program. For many creditors, this agreement was what convinced them to stay in the market.
This proposal seems to be well-intentioned, and has the potential to greatly benefit individuals by allowing them to fund a college diploma that they could obtain no other way. In general, it is inarguable that society benefits from a greater number of educated citizens. Having lenders who had previously dropped out return to the program is also a relief to students in the middle of their college careers who will not be left scrambling to find new lenders.
Theres also another bonus: Graduates who are less burdened by debt are more likely to pursue what they excel at and enjoy, rather than whats simply profitable. Society benefits from a myriad of careers that, although not financially lucrative, nevertheless require extensive training and education. The more expensive society makes it for people to graduate college, the less residual benefit it sees. Someone with $80,000 worth of debt to pay down would have a hard time looking into a career as a teacher or social worker, even if thats what they would otherwise want to do.
On the other hand, there are potential problems with these loan guarantees that may be overlooked. The education secretary will be required to purchase any loans presented to the department by private lenders. Lenders will therefore be likely to hand over to the government the borrowers it believes least likely to be able to pay back. The potential for lenders to engage in what is called moral hazard seems too familiar to the sort of risky lending that got our entire economy into trouble in the first place.
Clearly, there has to be balance. The governments interest is in an educated population, not a profitable climate for loans. To that effect, there are other measures to be taken. Perhaps money allocated toward buying and securing loans could instead be better distributed as grants or scholarships specifically geared to those interested in pursuing service-minded careers. Students who plan to graduate into lucrative professions should be less worried by the high prices of loans, as borrowing money for college will simply allow them to make a great deal more after they graduate. Government bailouts are never popular, and while legislators argue that their hand was forced before, here there seems to have been considerably more options ones that were overlooked.