Nevertheless, when government decides how to allocate scarce resources, it sometimes strikes the wrong balance. Some categories of federal credit — rural utilities, railroad upkeep, small business — benefit interest groups with no clear payoff for the overall economy.
The social benefits of government-backed student loans may indeed outweigh their costs. But even this program distorts the markets it’s meant to repair. A guaranteed flow of tuition dollars weakens colleges’ incentive to restrain costs. Tuition rises and students must borrow more.
Over the past generation, federal credit support for housing boosted homeownership rates — but not sustainably. The national investment in home mortgages was a lot more vulnerable to the ups and downs of the business cycle than a series of Congresses and presidents of both parties had supposed. The resulting excess supply may burden the economy for years.
Some experts believe that the government’s $706 billion student loan portfoliosignifies a similar bubble in higher ed.
Join the conversation as a VIP Member