Posted by: Haris H. | May 4, 2009

Subsidies to Students — and to Bank Profits

Economist Uwe Reinhardt* writes in the New York Times about changes being proposed to the system of federally subsidized student loans. In particular, he highlights the unsettling fact that Congress’s attempts to help students have also helped guarantee the profits of big banks. For this reason, many commentators have been calling for the elimination of the current system.

According to Reinhardt:

The options before Congress seem clear. For the same burden on American taxpayers or on the federal deficit, Congress could either

(A) provide more loans and scholarships to students by eliminating the more expensive F.F.E.L. program, or

(B) provide fewer loans and scholarships to students, but continue what really amounts to an income-maintenance program shoring up employment and profits for private lenders — an income-maintenance program to which these private lenders somehow feel entitled.

Eliminating this wasteful program is a great idea. While it’s true that government-subsidized student loans are a major contributor to the rapid increase in tuition costs, so long as they exist, they should be administered as efficiently as possible — rather than used as de facto gifts to powerful special interests.

One of the main arguments for subsidizing education is that it’s a public good — one that benefits not just the recipient, but the rest of us as well. Discover Scholars was founded in part to allow donors to fund such public goods directly and voluntarily, rather than indirectly through taxation. Regardless of whether you accept education’s claim to public good status, the logic surely doesn’t apply to bank profits.

UPDATE: Reinhardt responds to a reader.

*Full disclosure: Uwe Reinhardt was my undergraduate economics professor. We once had lunch together to discuss the movie Memento.

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  1. […] Out Middlemen USA Today recently editorialized on plans to scrap the Federal Family Education Loan Program (FEEL) and replace it with direct government loans. (For […]

  2. […] a larger and more important point: government aid goes to the politically powerful. We have already blogged about wasteful subsidies to banks. A different kind of distortion occurs when government funds are […]

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