The consequences of making low-interest loans to unqualified buyers created the real-estate bubble that popped in 2007, resulting in the Great Recession. According to Gary Jason at the American Thinker, it’s about to happen again, only this time over student loans. He wrote: “This bubble has been fueled by the federal government’s lavish subsidization of the student loan program … in a way similar to how the housing bubble was fueled by government agencies pushing subprime mortgages.”
Under the Student Aid and Fiscal Responsibility Act (SAFRA) signed into law as part of ObamaCare in March of 2010, students may borrow money directly from the federal government regardless of their credit score or any other financial “issues” they may be facing. They are not priced according to any “individualized measure of risk” nor are there loan limits. They are instead politically determined by Congress with undergraduates receiving lower interest rates than graduate students, but graduate students allowed to borrow more than undergrads.
This forced entry by the government into what was once a private market transaction has numerous consequences, nearly all of them negative, and most of them predictable.
First, private lenders disappeared from the market as they could not compete with taxpayer funds and taxpayer guarantees and the resulting below-market interest rates that became available.
Second, the growth in the education industry expanded far beyond what was normal as college administrations saw their opportunity to dip into the “honey bucket” of federal funds, with the consequent growth in administration overhead and higher tuition fees. According to a study by Bain & Company (yes, Mitt Romney’s Bain), “operating expenses are getting higher [at major colleges and universities like Cornell, Harvard and Princeton] and they’re running out of cash to cover it.” According to that study, the growth in those colleges’ debt and rate of spending on new buildings and equipment rose far faster than did their spending on actual education itself. Said Bain, "Boards of trustees and presidents need to put their collective foot down on the growth of support and maintenance costs. In no other industry would overhead costs be allowed to grow at this rate — executives would lose their jobs."
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