Dr. Richard Vedder, the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University and the director of the Center for College Affordability and Productivity, recently addressed the topic of federal aid and the cost of higher education, an issue that has received some attention on the PowerBlog as of late. Vedder critiques federal aid initiatives like the Pell Grant, which today helps the middle class more than the poor, but saw a twofold size increase from 2007 to 2010. Vedder’s article, titled “Federal Student Aid and the Law of Unintended Consequences,” levels a string of critiques against the current system and ultimately argues for a complete re-examination of federal student aid programs. A portion of his argument his excerpted below:
In the real world, interest rates vary with the prospects that the borrower will repay the loan. In the surreal world of student loans, the brilliant student completing an electrical engineering degree at M.I.T. pays the same interest rate as the student majoring in ethnic studies at a state university who has a GPA below 2.0. The former student will almost certainly graduate and get a job paying $50,000 a year or more, whereas the odds are high the latter student will fail to graduate and will be lucky to make $30,000 a year.
Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.
In the conclusion of his article, published in Hillsdale College’s monthly speech digest Imprimis, Vedder notes the good intentions with which federal aid programs were established. Unfortunately, these good intentions do nothing for the effectiveness of the system, now responsible for more debt than credit cards. With the debt crisis handcuffing so many Americans, a strong sense of moral urgency–paired with sound economic thinking–is necessary in rethinking the future of student aid in America. Vedder’s article is a useful start.