Privatization and the Student Loan Crisis

Tonight, the PBS News Hour featured a piece on Why American Students are Struggling with -- and Defaulting on -- Small Debts. New research (from the New York Federal Reserve, I think--it wasn't clear in the piece) found that borrowers with the smallest balances ($5,000 or less) were the most likely to default. This is a counterintuitive result that is interesting, but I think this piece skirts the issue of why we have so much student debt in the first place. If you are studying right-wing politics, you know the answer to this question but let's just make the causal model a little more explicit.

The path diagram above (click to enlarge) shows my theory of what's going on. The model is pretty clearly on display at the University of Wisconsin (here) but also applies to Kansas (here), Arizona (here) and many other US States with Right-Wing governments. The primary driver for the model is the Neoliberal policy emphasis on privatization, that is, encouraging public universities to become private entities. Once privatized, State funding for universities can be reduced, sometimes substantially. With the reduction in State support, the funding shortfall has to be made up by increasing tuition, sometimes substantially approaching and eventually equaling the fees charged by elite private colleges. To pay the increase in tuition, students and their parents need to take out loans. When the students graduate (if they graduate) paying off the loans provides profits for the banking industry which feeds back to encourage more Privatization.

The effect of this positive feedback loop on economic performance is unclear. Students with heavy debt cannot purchases homes, purchase automobiles or otherwise invest in their future. They have no discretionary income to spend in the market place and struggle to pay food and rent. The effect on National Consumption and Gross Domestic Product has to be negative. The Neoliberal hope is that the reduction in State support for Education will reduce taxes and stimulate economic growth. In Wisconsin, Kansas and Arizona, at least, this is not happening.

Quite simply, it is very important for government to stay in public education, keep tuition costs low, keep admissions open and keep standards high. At the University of Wisconsin, prior administrations have asked for more flexibility in the application of State regulations, particularly regulations covering building construction and employee hiring. What they received from Right-Wing State government was an offer to allow privatization in exchange for reduced regulation. This is an odd offer coming from the Right-Wing and it suggests that the Right-Wing has actually made little progress in reducing State regulation. In any event, the message for the University of Wisconsin should be clear:

What you get is something that will ultimately not be in the best interests of your students (or customers, I guess, if you are privatized). If you would like to see the entire News Hour piece, the video is below: