What the October legislation did

Our benevolent Senators and Congressmen were at it last fall. You see, Andrew Cuomo, an angry constituent base, and an looming election year were all influences in a mis-guided proposal.

The problem was simple: students are graduating with a lot of student debt. In a quest to gain a higher education and acquire the necessary skills to survive in the 21st century, our ranks have been seeking post high-school education at record levels. This is good. However, the university and college systems, responding to true supply & demand interactions, have been able to increase tuition rates while still attracting above average quality and quantity students. This also is good. Our environment is such that society is requiring a more skilled workforce and colleges & university's can charge more money to satisfy this demand. Yep, we've mentioned this before, but it's the free market at work. Don't fight it.

This is the part where the problem is highlighted: students attending college in greater numbers in a time when tuition and associated fees are increasing faster than inflation turned to student loans (both private and government based loans) to finance the demand. We tend to look at this as an investment....a social good.....the economy satisfying a market based demand. Nevertheless, our society is becoming better educated and luckily there is a government sponsored solution (FFELP) in place to facilitate the education expense. Heck, the marketplace even stepped in and created an additional solution (private loans) for individuals who required assistance beyond what the government could provide. We love free market enterprise. It seems to take care of a lot of society's issues.

Oh but wait, our benevolent lawmakers decided it was bad that students had to incur so much debt to become better equipped to participate in society. Clearly, it's the loans that caused these problems. Never mind that the tuition and fees charged by the colleges and university's had outpaced typical price increases. Must be the loans that the students took out that caused such social disruptions. Yes, we are mocking the legislation that took effect in October 2007. The loans were merely a pre-existing facility that allowed students to respond to a greater need to attain better education/training and to manage increasing tuition/fees. The loan process, of course, did not cause the problem of students incurring so much debt.

So, our benevolent legislators took matters into their own hands: they decided to eliminate profitability from the FFEL program. That way, it will be cheaper for students to attend college and the reduced cost of the FFEL program will be channeled into grants for lower income students. But something interesting happened: the reduced profitability of the FFEL program partially caused almost all of the private lenders to shut down their FFELP lending. So now, FFELP loans will be quite scarce this spring and summer....nay....non-existent. Students will have to rely on the Direct Loan program for their Stafford/PLUS allocations. We're gonna go out on a limb here and make two predictions about Direct Loans: 1) the Direct Loan program will come to a crashing halt this spring/summer. There is no way that a government based loan processing and disbursement program can keep up with the $60 billion demand for government sponsored education loans. The Henry D. Ford Direct Loan program will be crushed by June/July of 2008. 2) All the savings that our benevolent lawmakers predicted would be extracted from the changes they made in FFELP will be absolutely overwhelmed by requests for capital from the US Treasury to fund the Direct Loan program.

There you have it.....our legislators have made a huge mess. Granted, this big mess wasn't intentional, but this is the result of uninformed lawmakers going to work to solve problems when they only listen to the likes of Andrew Cuomo.

The problem here has been exasperated by the credit crunch. Tune in tomorrow and we'll vent about that in greater detail.