Government Paternalism Blinding Us From Our Own Financial Realities

College is generally regarded as the best time of your life. No parents, very few adults, significant amounts of free time, the ability to make your own schedule, alcohol and the occasional class. Mom, if you’re reading, all that is not to say we didn’t learn a lot. We did. Part of the reason many of us love college is that we have the chance to be surrounded by very smart people nearly all the time.

Many like to call the college experience “priceless.” The experience may be, but  higher education certainly carries a definitive price tag.  And it is a hefty one.

The average tuition of a public four-year university is $7,020. This doesn’t factor in food, housing, and other living expenses that can easily top $10,000 to $15,000. And we’re talking in-state, public, and small town. Deviate from any one of those three categories and we’re really talking big bucks.

Beyond lots of ramen-based meals, these substantial costs can also lead to lots of student loan debt. The average debt upon graduation is $23,168. That figure excludes PLUS Loans and other types of parent-student loans in which the parent takes on the responsibility for the loan.

Can students really afford to pay all this back? As a recent New York Times article explains…not always. The article profiles Cortney Munna, a 26-year-old graduate from New York University who amassed nearly $100,000 in student loans. The problem is an “eerie echo” of the mortgage crisis in which millions of homeowners found themselves unable to afford their mortgages. As the Times writes ,

Tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.

Meanwhile, universities like N.Y.U. enrolled students without asking many questions about whether they could afford a $50,000 annual tuition bill. Then the colleges introduced the students to lenders who underwrote big loans without any idea of what the students might earn someday — just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

The similarities do not end there. The government’s altruism is behind both plans. They wanted more people to own houses just like they want more people to go to college. Each of these goals is blinding people from the financial realities of their decisions. Owning a house is great. Having your house foreclosed and your credit score fall through the floor is not. Going to an expensive but prestigious college in a big city is great. Having a $100,000 student loan bill hanging over your head for the rest of your life is not.

Government intervention was one of the key ingredients of the fiscal crisis that has paralyzed our nation for the last two years. Even leaving out the obvious Fannie Mae and Freddie Mac argument. Consider the Community Reinvestment Act of 1977 that encouraged “innovative” loan solutions to allow low and moderate income families to receive home loans. In practice this often meant getting rid of the traditional 20% down payment and income requirements. For instance, a pamphlet issued by the Comptroller of the Currency Administrator of National Banks exemplifies some “outstanding CRA action for community banks” which should act as “helpful hints” for others. Among them it lists :

  • First National Bank of the Berkshires’ offers a “most innovative product” that offers “customers of all income levels, that requires only a 3 percent down payment”
  • First National Bank & Trust of Corbin, to help meet the area’s credit needs, offered “low-income housing loans that carry flexible underwriting guidelines, reduced closing fees, and lower down payments
  • The First National Bank in Hawley, Minnesota encouraged employees to “find a way not to turn customers away” and offers first time home buyers a below market interest rates, maximum income requirements, and down payment assistant to lower income borrowers

We’ve since learned that shoving people into homes may not be good for anyone. Foreclosure can have a negative financial impact that reverberates throughout the rest of your life. Regardless of the lessons we’ve taken from the collapse of the housing sector we are not applying them to student loans.

Of course, lending to students is much different than homeowners. Almost by definition students are notoriously bad credit risks. They are too young to have reliable credit histories, they have nothing that could be posted as collateral, and they have nothing but an hope of future employment. In other words, if students are going to get any money at all, it is because the government is willing to back them up.

This does not mean that all governmental involvement is good governmental involvement. Before the recent legislation, the federal government encouraged lending at low interest rates by providing subsidies to private banks making student loans. Following the Student Aid and Financial Responsibility Act that was thrown in with the health care overall, the government sought to cut out the middleman and increase access to student loans. If anything, this may make the risks even worse. As Jane Shaw, president of the John W. Pope Center for Higher Education Policy explains ,

The problem at the center of the current program, and the new program, is the government subsidies themselves. Taxpayers cover a portion of the interest rate and the costs if students default, which they are doing in increasing numbers.

These subsidies sound good because everyone wants young people to have access to college. But in addition to the cost they impose on taxpayers, they can be harmful to the students themselves, turning students into lifelong debtors. And they push up costs, making college increasingly inaccessible for everyone.

Washington must understand that their philanthropy isn’t helping. It is being heartily accepted by people so excited to receive it that they overlook the long-term consequences. Homeowners so thrilled to own their first house that they were willing to stretch their income to the breaking point. Students so overjoyed at being accepted to the best collected that they overestimated their future income and their ability to pay back huge debts.

Coddling is not what people need. As Ms. Munna from the New York Times article explains ,

“Had somebody called me and said, ‘Do you have a clue where this is all headed?’, it would have been a slap in the face, but a slap in the face that I needed. When financial aid told her that they could get her $2,000 more in loans, they should have been saying ‘You are in deep doo-doo, little girl.’ ”

Our nation is in deep doo-doo unless our government begins to remove its blinding influence from the financial decisions of many families. Education and home ownership are things that our government should work toward, but not at the risk of bankrupting families and our country.

by Brandon Greife, Political Director of the College Republican National Committee