Another Example of Why Socialism Doesn’t Work: Student Loans

Here’s how the federally administered student loan program works:

This afternoon CBO responded to Senator Gregg’s request for estimates of the budgetary impact of the President’s proposal to eliminate the federal program that provides guarantees for student loans and to replace those loans with direct loans made by the Department of Education.

The Federal Family Education Loan Program (guaranteed loan program) provides federal guarantees on loans for higher education that are administered and funded by private lenders. The guarantee ensures that lenders will receive almost all of the principal and accrued interest owed to them if borrowers default. The William D. Ford Direct Loan Program offers eligible borrowers nearly identical loans that are administered by the Department of Education and funded through the U.S. Treasury. Under the President’s proposal, all federal student loans originated after July 1, 2010, would be made by the direct loan program.

Reread the part in bold.  Student loans are guaranteed by the federal government, including principle and interest.  Now there’s a deal!

When I went to college in the mid 1980s, my bill was $800 a semester or $1600 a year.  Let’s jump to present, in Cincinnati, where tuition has jumped to over $10,000 a year:

UC trustees Tuesday approved the tuition increase, its first in four years, which will add $666 per year for undergraduates on its main campus. For in-state students, that will take the cost of a year at UC past $10,000 for the first time.  Read more…

Colleges and universities aren’t stupid.  Here’s the federal government interfering in the market system, guaranteeing student loans.  Obviously, there aren’t any meaningful caps on these loans and thus, with this knowledge in hand, higher education knows they can charge higher and higher tuition rates because the federal government will pay for it.

Students don’t care about the high tuition rates, because they know, ultimately, they can default on the loans and Uncle Sam will pick up the bill.

What a system.