Feeding the Looming Academic Lending Crisis

On the one hand, Governor Paterson is pushing to raise the tuition at the City University of New York and the State University of New York.

On the other hand, he's calling for the creation of yet another low cost lending program for low income students seeking higher education.

The program would provide $350 million in loans each year, with the state spending $50 million next year to start the fund, and $10 million annually. The state is now recruiting banks to underwrite the loans, which the state would buy using revenue from tax-exempt bonds.

Mr. Paterson said in a prepared statement that he was financing the program despite the state’s estimated $15 billion budget deficit because it was essential to keep New York competitive with other states offering similar incentives. It comes alongside Mr. Paterson’s plan to raise tuition by $350 a semester at the State University of New York and the City University of New York, the first increase in four years.

Does anyone see a problem with this?

I do.

It's the same thinking that got the nation into the current financial mess by pushing the notion of "affordable housing" - low cost loans and driving up the price by inflating demand with a limited supply.

While higher education is important to the economic development and growth and competitiveness of the state for the long term, this proposal - like any that grossly distorts the markets and provides incentives for increases in state spending - is flawed on an economic basis. It will put students at risk of being unable to repay those loans (that now have to take into effect the higher tuition to boot).

The sad fact is that education costs have skyrocketed out of proportion to inflation or any other measure for that matter. Easy credit is a big reason that this has happened. Costs for education at state schools in New York are quite competitive when compared to NYU or other private universities, where four years of college education could cost you a mortgage and then some ($50,000 a year!). SUNY and CUNY are bargains in comparison, and yet they are becoming less affordable with each passing year because of tuition increases and related costs increasing beyond the ability to repay the loans taken out for college.

No wonder you have some people pushing for tuition increases. These campuses are economic engines around the state, and are major employers in many localities, particularly upstate. SUNY trustees have already voted to increase tuition, but Paterson's proposal would use the tuition increase for the general fund rather than to support SUNY and CUNY operations. Any money generated by tuition increases results in lower state subsidies for the state university system.

Paterson's proposal is going to stick it to everyone without any measurable benefit to academic achievement. We're talking about a tuition increase of $700 a year at the state and city colleges and universities, and the solution is to provide additional access to loans? Who exactly is Paterson kidding here?

The proposal doesn't control costs, and provides still more incentives for waste at the universities since they do not need to worry about revenues. Under this proposal, the colleges and universities get "state-funded" revenues coming and going - higher tuition and then a subsidy for student loans to ensure that enough students can afford the higher tuition. It's designed to keep enrollments up, and little more.

And students exiting college face the prospect of having significant debt and with a tight economy, reduced prospects for jobs that can pay off the student loans in a reasonable period of time. It's a financial time bomb, and it continues ticking.