The PJ Tatler

As Student Loan Debt Forgiven, Congress Oblivious to Their Role in Fraud

Corinthian College was a for-profit educational institution that went under after years of inquiries into allegations of fraudulent recruitment practices. Staff at Corinthian allegedly “falsified job placement rates and used unscrupulous marketing practices,” as reported by the Minneapolis Star Tribune.

Now the Department of Education has announced that they will discharge certain student loan debts incurred to attend Corinthian on a case-by-case basis. Republican Representative John Kline, who chairs the House Education and Workforce Committee, joined Democrats in a statement supportive of the ruling. Others, including Kline’s Minnesota congressional delegation colleague Keith Ellison, think the ruling didn’t go far enough. Education Secretary Arne Duncan, who announced the decision, called upon congress to further regulate for-profit educational institutions to avoid similar scenarios in the future. From the Tribune:

“To members of Congress: Students and taxpayers need action to strengthen accountability,” Duncan said. “This has to be a wake up call to Congress …They shouldn’t want to stand behind guys where there is so much deception … and waste of taxpayer dollars.”

Lost amid reaction from government bureaucrats and politicians is any acknowledgement of their role in inviting the Corinthian fraud. True regulation is a function of the market. If your only means of parting a customer with their hard-earned money is providing a value in exchange, then fraud becomes a bad long-term business strategy. If, however, you can part a third-party (like a taxpayer) with their money without consent, fraud becomes much more attractive. That’s what the federal government has done with its education subsidies, including federal student loans.

Under the guise of helping students, fueled by the notion that every kid is somehow owed a post-secondary education, the federal government rains taxpayer dollars upon institutions who enroll qualifying students. Since the students in question are usually fresh from the nest and wholly disconnected from the experience of paying back a loan, they tend to see only the goal and disregard the long-term consequences of embracing loans as their means.

In a free market where government loans did not exist, the behavior of both for-profit institutions and students would be regulated by their respective self-interest. Students may not be competent to judge how much debt they should take on. But loan officers working for private banks would be. They would take a look and things like the economic value of a chosen major, then consider whether loaning a student money to pursue that path would prove profitable in the long-run. In turn, colleges and universities would stand incentivized to provide a better product, because that’s the only way they could attract financing for their students.

Put simply, Education Secretary Arne Duncan and Representatives John Kline and Keith Ellison ought to be looking in the mirror. They are the problem. They are the reason the education market is not properly regulated, not for lack of bureaucratic rule-making, but due to how their subsidies distort market signals. The effect upon students is devastating, with graduates debt-laden and unemployable in the name of “getting a degree.”

Forgiving student loan debt will not solve that. Eliminating government subsidies will.