May 6, 2012

A Law Professor Argues for More Student Loans

A law professor argues for more student loans.

First, the professor laments the lack of risk-based student loans. 
Although risk-based pricing is standard in business loan markets, and is increasingly common in consumer credit markets such as mortgages and credit cards, risk-based pricing is rare in the market for student loans. The reasons for the rarity of risk-based pricing in the student loan market include limitations of the available data, bankruptcy and collections laws that shift default risk from student loan lenders to borrowers, and moral and philosophical beliefs about the primacy of individual choice and the role of education as an engine of equal opportunity.

Then, argues that risk-based pricing for student loans will lead to more efficient allocation of capital and lead students to better opportunities. 
the lack of risk-based pricing in student loans may ultimately undermine many of the interests and values that uniform student loan pricing ostensibly seeks to promote. Without risk-based pricing of student loans, there may be no reliable price signal about the long-term financial risks inherent in different courses of study. This lack of price signals undermines students’ ability to make informed decisions about the course of study that will best balance their innate abilities and individual preferences with postgraduate economic opportunities.

The professor is arguing the more “sophisticated” risk-based loans he hopes will fix the problems with student loans - sophisticated mechanisms that have been tried-and-tested in the efficient public capital markets (we all know how well that is turning out).

The professor completely misses the point.

The problem is not student loans, higher education as a whole is broken. Student loans just help universities (who are stuck in the past) maintain their status quo. Their sales funnel stays intact and they keep getting more customers (students) through their gates. This is true of Harvard as well as bottom-ranked Universities

As long as universities keep feeding students useless education – the four years is a tremendous waste of time and money for students and everyone associated with the process. No amount of “sophisticated” student loans is going to fix that problem.

What is needed is on-demand university education, at very low costs and education that is equally accessible to all rather than determined by some bogus student loan or selection criteria.

Udacity and others are taking the right steps in this direction and no student loans are required to attend Udacity classes. Hopefully efforts like these break the status quo in higher education.

Tags: risk-based student loans, sophisticated student loans, udacity free university education, more student loans, student loan policy, on-demand university education