Ron Paul: End Student Loans?

Student Loan money is funny money - and drives up the cost of education.

I am not a big Ron Paul fan.  The guy - and his followers - come across as crackpots.  But even a stopped clock is right twice a day, and recently, he called for an end to Federally Subsidized Student loans.

The reaction to this proposal was typical.  The media reported it as "Ron Paul calls for end of Student Loans" - as if all student loans would go away under his proposal.

And bloggers and whiny people say things like, "Well, then only the RICH will be able to afford college!"  which is idiotic on its face.  Schools need to put butts in the seats, just as airlines do.  It is not big "privilege" anymore to be accepted into college - anyone with middling SAT scores and grades can get in.  Just as it is not a "privilege" to be allowed to fly on a plane.  You pay your money and take your seat.

The difference is, of course, is that we all shop competitively on air fares and we all just forget everything we've learned about economics when we shop for colleges.

If people stopped flying on an airline, the airline would go broke - or lower its fares.  If people stopped applying for college, colleges would go broke (and many appear poised to do so) or lower their tuition.  And as the number of potential college-age people in our population shrinks, colleges are going to be in a lot of trouble - trouble of their own making.

And one problem is the funny money of student loans.  Kids think, "Gee, if I buy a $200,000 private college education, it will make me twice as much money as a $100,000 State school education!"  But that is not really the case.  Just as your High School record really only is relevant to getting into college (Trust me, despite what your Principal says, no one looks at your 7th grade Algebra test scores, or the black marks on your "permanent record" once you are an adult), your college diploma is only really relevant to getting that first job.  Once you prove your way in the marketplace, it really makes less difference where you got your degree, provided it wasn't at some real Podunk University.

There are, of course, exceptions to the rules.  I interviewed with a fellow I used to work for, who went off to a "Big Name New York Law Firm".  He wanted me on board, because they had no one there who would stoop to actually writing Patents for them.  But, he explained, the Partners in New York City decreed that only the best and brightest law school graduates from the top tier law schools could even apply.  Unless you were on Law Review at Harvard, forgetaboutit!

But the deal is, those positions represent less than 1% of the jobs out there - and the likelihood of you getting into Harvard or Yale or whatever is pretty slim anyway.  You aren't going to starve just because you didn't go to a name brand university.  And that fancy New York Law firm?  They went belly-up, of course.  Their pedigree lawyers were pretty to look at, but didn't actually do much, in the way of real work.  In the new economy, few companies are paying $500 to $1000 an hour for someone to look pretty.

The reality of college today is that  most students are overpaying for the education they are receiving.  And a LOT of students are paying so much that they can never get out from under the debt - which becomes a crushing burden on them for the rest of their lives.

This is the system people are defending against Ron Paul's proposal?  Go Figure.

Mr. Paul points out another unfairness of the system - that government subsidy of these loans puts the taxpayer on the hook for the potential payback.  So, in effect, the working class has to subsidize the college educations of the middle class.  One group of citizens should not be asked to subsidize the activities of another - particularly when the activity being subsidizes favors a well-off class of people.

And this illustrates how even well-intentioned actions by the government to subsidize, guarantee, or otherwise encourage certain activities - whether it is growing corn, buying houses or electric cars, or borrowing money to pay for education - can backfire in a big way.

The Ron Paul's and the flat Taxers of the world might be a bit crazy and naive, but they to have one point to make:  Maybe the government should stay out of the business of creating systems of incentives and let people do what they would be naturally inclined to do in the first place.