Tuesday, June 03, 2008
Citibank to CC's: Drop Dead
Several alert readers sent me links to this article from the New York Times. Apparently, Citibank, JP Morgan Chase, and several other major lenders have stopped providing student loans to students at many community colleges and some less-tony four year schools. The key quote:
The banks that are pulling out say their decisions are based on an analysis of which colleges have higher default rates, low numbers of borrowers and small loan amounts that make the business less profitable. (The average amount borrowed by community college students is about $3,200 a year, according to the College Board.) Still, the cherry-picking strikes some as peculiar; after all, the government is guaranteeing 95 percent of the value of these loans. (emphasis added)
Education loans are a tricky business in the best of times. You can't really repossess an education, the way you could repossess a car or a house. So the way to get private lenders to take the chance of being stiffed, in the absence of collateral, without having them charge politically unacceptable interest rates, has been through subsidies and guarantees.
Here's where my Scandinavian/social democrat side gets confused. If you have to subsidize and guarantee anyway, why do you need private lenders at all? Why not just have a single public agency, with a single set of rules and a single pile of paperwork? Run it on a non-profit basis, and let Citibank and its ilk lend for houses and cars and businesses.
If that's still too much paperwork, you could always replace the loans with scholarships. Call them vouchers, if that makes you feel better. I prefer 'grants,' but to each her own. If an educated workforce and citizenry is a public good, and I believe strongly that it is, then why not have the public handle it?
Come to think of it, this might work for health care, too. Why deal with 500 different sets of HMO paperwork, each with its own incentives to make 'mistakes'? If only there were a precedent for a single-payer system in an advanced country, with lower health care spending and better outcomes...
This is so seriously messed up, it's hard to know where to begin. First, there's the ecological inference fallacy. Credit risk is supposed to attach to people, not groups. If I've defaulted many times before, then yes, I'm risky. But if others who share my zip code have defaulted, does that mean I'm more likely to? This smells like educational redlining.
Then there's the staggeringly obvious fact that different majors at the same college have different employment prospects. Our Drama majors have some difficult choices to make, and face long odds in their field of study; our Nursing majors are hired before they graduate. Averaging them together tells you about...who, exactly?
And what about the students who transfer to complete four-year degrees? How do they count? In my mind, they count as 'successes' for us, but I could see where they'd drag down the 'starting salary' figures.
Besides, if ability to pay the loan back were really the issue, wouldn't the smaller loans be the ones least likely to get cut? It's easier to pay back $3,000 than $30,000. I would think the community college Nursing grads would be the best risks, since they combine small debts with healthy salaries upon graduation. But Citibank is cutting those, while happily lending $50,000 or more to poetry majors at Midtier State. Ability to pay ain't the issue.
The category mistake here is in treating a largely public good as a purely private one. Lenders get paid back by individuals, so they have to think in terms of a private good. But higher ed was never meant to be nothing more than the personnel office of the economy (even if it has a role to play there).
Some folks have an ideological interest in claiming that any market move must be right by definition. But for those of us who prefer to deal in objective reality, this just smacks of straight-up class bias. After all, the same banks who turn up their noses at community college student loans have been more than happy to lend those same people much larger amounts of money in subprime mortgages. No, this isn't economically rational or the act of a disembodied market. This is snobbery, this is wrong, and this needs to be dismantled.