Mark Franke: Student loan bailout looks like whiskey at the polls

Politicians used to “encourage” citizens’ affirmative votes by tapping casks of whiskey on polling stations. The stakes are higher these days, as our representatives in Washington, DC think much bigger in both dollars and voters. The other difference is that those casks of whiskey came out of the pockets of the candidates while their successors have the federal treasury on call.

President Biden’s resolve to forgive billions in student loans puffs kegs of whiskey and the cynic in me argues the goal is the same.

In the interest of full disclosure, I began my career in higher education administration as a financial aid officer, entering that profession just as student loan eligibility was being expanded. to include almost all students.

That’s not my only connection to this program. I took my first $500 student loan from a local bank, the only requirement being that I move my checking account from a competitive bank to this one. This was the incentive for commercial banks to provide student loans at the time. The loans were not very profitable, but the hope was to develop new customers for life. I am still with the successor of this bank more than 50 years later. The incentive worked in my case.

After Congress acted to open the federal student loan program in 1978, many banks appointed specialized loan officers to generate as much business as possible. It became profitable for them as long as the federal government assumed much, but not all, of the risk. The government set the interest rate and subsidized interest costs while the student was in college and for nine months after graduation.

The goal of the student loan program in its many incarnations was to encourage college attendance by low- and middle-income students. He did, but with several unintended consequences. First, many students started college on loans but never graduated. They left in debt, but without the increased earning power that usually accompanies a college degree.

Second, colleges have used loan accessibility quite effectively as part of their student recruitment efforts. Net tuition, the actual amount paid at enrollment by the student or parents, could be kept quite low. Reminding students that they should repay those loans was not so effective, no matter how good the intentions.

It can be argued, with economic theory to back it up, that these extra dollars have shifted the demand curve for college enrollment, resulting in higher prices charged. College administrators have always denied it, but their protests ring hollow.

Economics 101 demystifies this quite easily. The recent suggestion that colleges should be charged for their share of the cost of forgiveness may be ironic but does not entirely miss the mark.

The strongest objection heard is that there is an inherent unfairness in Biden’s proposal. It benefits a small part of the population at taxpayer expense. Those who attended low-cost colleges to avoid borrowing, those who attended part-time while working full-time jobs for the same reason, those who chose not to attend traditional college schools in favor of immediate entry into the labor market, especially those who have fully repaid their loans. Those voters could be lining up in front of the other party’s casks of whiskey in November.

What about that $500 loan I took out in 1969 to pay for spring tuition? This was the first of several for my wife and me. After we got married as undergraduates, I wasn’t sure how we could repay the $4,000 we borrowed from each other. We did it, as quickly as possible. The loans have been good investments for us as we have both pursued professional careers and are now comfortably retired.

Maybe the Franke family can get a share of the more than $300 billion on offer. Oh I forgot. Students who have repaid their loan are not eligible.

Indiana Policy Review associate researcher and book reviewer Mark Franke is formerly associate vice chancellor of Indiana University-Purdue University Fort Wayne. Send feedback to [email protected]

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