It’s Not About Student Loans – It’s About the Market

It’s Not About Student Loans – It’s About the Market


Heading west from downtown Tallahassee on College Avenue takes you right up to the east gate of Florida State University. In front of you is the old administration building, Ruby Diamond Hall. It looks like the front of an old castle and the fountain in front of it symbolizes a moat that visitors who dare become members of the Tribe must cross.

Crossing that moat has its benefits. It means access to educational services. It puts a student on the path of developing relationships and networks that can lead to employment. It means leveraging your affiliation with an Emory, FSU, or Harvard for business opportunities. It means getting that certification, that piece of paper that sends, at most times, the incorrect signal that you are smart, but the clear signal that you had either the stamina, savvy, or both to survive four, five, or six years of tedious studying, boring lectures, and good looking co-eds.

Yes. Cross that moat. Enter that building. Become Seminoles for life.

Long gone are the days where, if you worked enough hours at the local Burger King you could pay for some if not all of your tuition at FSU. Tuition increases every year it seems, and that dollar you made from stacking books in the library or running frozen burger patties through the broiler at BKs doesn’t come close to covering those school expenses.

Yes, the moat has gotten wider.

So kids today find themselves tipping their toes into two markets; the first being the market for educational services, and the second, is the financial market for borrowed funds. FSU wants to sell a student access to education, diploma, networks, and school reputation. The student is willing to pay for it, either out of pocket, or with the funds she borrows from family, friends, church groups, or a bank.

While family, friends, and church groups may love you, love is not the collateral banks want. Student loans are risky. They are typically not backed by collateral. Borrowers may take a long time to repay. Banks probably would not finance student loans if it were not for the federal government backstopping loans with guarantees. Guarantees take the risk out of lending and are the basis for relatively low interest rates enjoyed by these loans.

The problem with the government intervening in the financial market is that loan guarantees distort the real cost for borrowing money. We can’t expect to promote community college and university level education and not expect the increased demand for college and loanable funds to drive up interest rates, yet here we are debating whether a reduction in student loan rates, authorized five years ago under the Bush Administration should be extended.

In addition, is the guarantee even proper policy? Yes, the government has an interest in ensuring that America has an educated workforce, but at the same time should it ensure that one business model for delivering college-level education survives when there may be other vehicles available for delivering knowledge?

For example, social media can be used to drive down the cost of getting an education and acquiring knowledge. In 2009, reported on the use of social media by the United Nations to provide a tuition free university on the Internet. The University of the People opened its cyber-doors in 2009. Through the use of social media and open source software, UOP offers bachelor’s degrees in business administration and computer science. Applicants must speak English and pay a nominal fee for applying to the school and taking exams.

Granted a UOP-model couldn’t work for all academic disciplines. It couldn’t work in nursing or dental school. You can’t practice cleanings and using syringes online. The social media-based model is disruptive enough to find us asking why state legislatures and university systems are not requiring their colleges to incorporate more of these models into their education delivery systems.

The response right now is why bother. With the government guaranteeing loans, the students will keep borrowing and the revenue will keep flowing. There really is no incentive to change. But if rates were to go up and the increased expense for attending traditional colleges and universities were to increase further, there may be more room for innovative delivery systems such as UOP to show up in the education services market, thus providing students with alternatives.

Let’s narrow the moat, and by the way: Go Seminoles!


  1. I agree, let the market sort things out. My kids all got full scholarships, otherwise they would not have been going to $40K per year private universities. And UOP stands for the University of the Pacific, in Stockton, CA, which is where I attended one year during my college journey. Also, the status quo of keeping student loan interest rates the same, fails to address the fact that 27% of student loans are delinquent [<a href="">Federal Reserve Bank of NY]. Will recent alumni suddenly be able to make their payments because of the governments non-action?

  2. It is the market's inability (unwillingness?) to provide financing for higher education that justifies the state's involvement with grants and loan guarantees. I would think the justification for higher education in a highly mobile, post-industrial society need not be explained.

  3. When my son was applyin for college about twelve years ago, we went to a session at the local school to hear how to fill out the FAFSA form. The presenter was the head of Student Financial Services at Washington University. He was a full-fledged CPA. At this meeting I found out that the university lends its own money at interest to students!! This is intended to be a money-making proposition for the university, which has a huge endowment invested. So much for not-for-profit status.

    It struck me that this money lending situation wss (a) a conflict of interest, and (2) destroyed any incentive to keep down the cost of education.