Higher education is one of those areas—like health care—in which prices are so out of whack because of so many distortions in the market that it’s hard to know just how to go about rectifying the situation.

Richard Vedder, a great economist who has done pathbreaking work on the causes of the Great Depression, offers an incisive analysis of a Democratic proposal to lower student loan interest rates. It serves as an excellent case study in the law of unintended consequences.

By the way, the bill, which was voted on yesterday, passed.

  • http://www.hubsandspokes.com marc

    The Wall Street Journal [url=http://online.wsj.com/article_print/SB116900867273378654.html]ran an editorial[/url] on this topic yesterday. It’s behind the subscription wall, but here’s a taste:[quote]The interest rate doesn’t affect whether a student can pay his or her tuition bill, which means that no one unable to afford college today will suddenly be able to do so because of a reduction in the rate. Rather, lowering the rate will simply boost the federal subsidy for loan repayments after graduation. That’s because the financial institutions that handle these loans are guaranteed a rate of return, regardless of the interest rate. Halving the rate that lenders can charge borrowers means larger government (read: taxpayer) subsidies for the banks.

    In other words, the Democratic loan proposal isn’t really about making college more affordable for low-income families. It’s about expanding federal subsidies for college grads, including millions of middle-class men and women who will go on to do very well in life and hardly need such a government handout.[/quote]

  • http://baselive.org Nensy

    A recent Diamondback editorial, “Expanding Quality” (December 1, 2006), took aim at the university’s efforts to make college more affordable for low-income and minority students, referring to an Education Trust report as dealing Maryland “another blow.” The Trust, a nonpartisan and nonprofit group, evaluated the progress being made on this issue by flagship universities across the country. At the time of the Trust’s report, however, President Mote disagreed both with its findings and its methodology.