January 20, 2022

by Stephen Stofka

Socialist policymaking is founded on an aspirational principle of equal outcomes. Central to that approach is an expanded role for government as an insurance company, the insurer of last resort. Should government be the insurer of first resort? Some would prefer that but others are uncomfortable with the lack of privacy that entails. A characteristic of insurance is what economists call asymmetry of information. The insured knows more about their situation and risks than the insurer. Do we want to give government an incentive to pry into our private lives? Can government protection create a moral hazard? Will people be less careful or less industrious because they trust that government has their back? Student loan debt brings a pointed focus to some of these issues.

According to 39 state Attorney Generals, Navient was a predatory servicer of high-interest loans for students attending for-profit colleges (Settlement Administrator, 2022). In the mid-2010s, the Obama administration put its foot down with many  for-profits – if they could not meet minimum graduation rates, they would be cut off from federal funds. Many folded. Recently, 39 states  reached a settlement with Navient that gave relief to many thousands of student borrowers. Who was given no relief? Students who had been paying their loans on time.

In many areas of our lives, we disagree about who is responsible for the risks of unwelcome outcomes. A person who gets an education assumes a certain risk that higher lifetime earnings will be greater than the cost of an education. Such a risk cannot be quantified or insurance companies would sell policies to college students. However, the federal government provides some guarantee for federal student loans. Colleges, including for-profit schools, are usually accredited. That accreditation provides some assurance – but not insurance – to a student that a school’s curriculum has sufficient quality to earn the accreditation. However, conventional non-profit colleges are supervised by regional accrediting organizations that have higher standards than the accrediting bodies of for-profit colleges (The Best Schools, 2022). Without the regional accreditation, for-profit students often discover that they cannot transfer their credits to a 2-year or 4-year college. Employers may doubt the worth of their educational credentials.

Is this a case of buyer beware? How is a college education different than starting a small business? Students have a wealth of research available to them before they enroll in a for-profit college. Should taxpayers pick up the tab for students who may not have done adequate research before committing to a student loan?  Every year hundreds of thousands of small businesses go out of business for the same reason. They did not research the market. They didn’t have adequate management experience. Many people may be stuck with 2^nd mortgages used to fund the business. Should taxpayers bail out small business owners? 

Financial and medical risks can be substantial and we may vehemently disagree about government’s responsibility for absorbing these risks. Government now insures us against loss of income due to injury (workmen’s compensation) or permanent inability to work (disability insurance), old age (Social Security), protects our pension funds (ERISA), insures our homes against flooding (Flood Insurance Program). It pays our medical bills if we are poor (Medicaid) and when we are old (Medicare).

Should government have a minimal or expanded role in our lives? If we want government to have our back, what is the limit? What are the boundaries between government and our lives? What is the extent of our personal responsibility? How much risk must we shoulder? There are many strong opinions on the subject.

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Photo by Lina Trochez on Unsplash

Settlement Administrator. (2022, January 13). 39 State Attorneys General Announce $1.85 Billion Settlement with Student Loan Servicer Navient. Home. Retrieved February 20, 2022, from https://navientagsettlement.com/Home/portalid/0

The Best Schools. (2022, January 6). Guide to for-profit colleges: What you need to know. TheBestSchools.org. Retrieved February 19, 2022, from https://thebestschools.org/resources/for-profit-colleges/