End Government Subsidization of Student Loans

Notwithstanding the magnitude of student loan debt in the U.S. (over $1 trillion), government subsidized student loans permit more students to go to college. This is not a good thing.

Many students who receive subsidized loans to enable them to go to college, but would not be subsidized by a university, would be better off not going to college. College is not for everyone.

There is no constitutional guarantee to go to college, nor should there be:

From the standpoint of society as a whole, the goals of higher education are to enlarge general . . . human capital by imparting valuable intellectual skills to young people of intelligence and ambition.

These subsidies distort the market process:

Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan. The stock of student loans has reached $1 trillion, while the percentage of borrowers in default jumped to 8.8 percent in 2009 from 6.7 percent in 2007.

What’s the alternative? Free-market equity contracts:

A true free-market system equalizes opportunities, if not for fairness, at least for efficiency: talent should not be wasted.

The best way to fix this inefficiency is to address the root of the problem: most bright students do not have any collateral and cannot easily pledge their future income. Yet the venture-capital industry has shown that the private sector can do a good job at financing new ventures with no collateral. So why can’t they finance bright students?

Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance.

This is not contracting economic slavery; rather, it is an efficient allocation of scarce resources by the free-market.

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One thought on “End Government Subsidization of Student Loans

  1. This is assuming those that graduate will have an income worth investing towards. What about those people that want to go to college to get into a journalism career – we need journalists, but they don’t get paid very much. What incentive will people have to become artists or writers? These people contribute to our quality of life.

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