A recent study by Brian Tamanaha, a law professor at Washington University in Saint Louis (which came to my attention via Hans Bader at the Competitive Enterprise Institute), highlights yet another foolish form of industrial policy practiced by government: student loans and subsidized interest rates.
In this case, the source of alarm is the huge $100,000-plus debts incurred by students to go to law school. These debts are typically highest at the bottom-tier schools, where the earning prospects are the lowest. Often these debts have parental cosigners who could be liable for repayment just as retirement hits. The issue, moreover, is not confined to law schools. It is pervasive in other labor markets and in undergraduate education. We have already seen a mortgage bubble pop. Perhaps we are now in for round two.
Much of the source of this problem comes in federal government policies to subsidize student loans to the tune of billions of dollars per year. The usual argument is that education is an investment in the future, which it surely is. But what the massive infusion of government funds into the market does is to increase the level of unwise future investments. Cheap loans lead to excessive borrowing, which in turn leads to unwise career choices. If the government cut down on the loans that it subsidized, it could also cut down on the taxes needed to fund these programs. The extra money left in private hands could help finance better educational choices, which in turn would reduce the default rates at the end of the process.
Here, as in so many other places, a wise and sober second look at a dysfunctional educational system would turn away from public interventions at every level. Indeed, what is happening with student loans is also happening with state-provided education, as squeezed budgets create serious difficulties for flagship universities and community colleges alike. The Obama Administration has made it a priority to be tough on for-profit institutions. But a far better approach would be to strengthen those institutions, that, if properly run (and often that is a big 'if'), can contribute revenues to the public treasury instead of taking from it.