Proposition 2

In November, Texas voters will be given sixteen amendments to approve or reject. One of these, Proposition 2[1] is about providing loans through government bonds in order to help college students, or that’s the way supporters would like to put it.

Senator Judith Zaffirini, D-Laredo published a commentary in the Austin American Statesman that explains why she supports the bill. With all due respect, her argument is a total misunderstanding of economics and will simply promote irresponsible use of credit. Senator Zaffirini, who is the chairwoman of the Texas Senate Higher Education Subcommittee, supports this bill because, according to her, it will help fund “the education of our children”[2] without increasing taxes. It sounds like a worthy goal, but there are two major economic flaws in the plan. Firstly, it produces a synthetic, artificially enticing environment for student debt to only increase. Secondly, her argument doesn’t consider any of the great opportunity costs associated with this plan. Basically, there are better things we could do with the money.

The reason that interest rates on student loans are so high is because there is a lot of demand for loans. Its the simple economic law of supply and demand. According to the National Center for Education Statistics, the number of students who have debt increased ten percent between 1996 and 2000 and the average student’s debt increased 36%.[3] This statistic reflects one of the major problems with American today; we overuse credit. Because of this, the market is making corrections by raising interest rates, which will ultimately discourage students from taking too much money in loans. However, if Zaffirini has her way, the Texas government will just encourage this debt explosion by utilizing artificial, government-stabled interest rates that do not respond to the demands of the marketplace.

This is the first and greatest reason that I believe we should vote against prop 2: The Texas Government should not encourage debt! Artificially induced market situations only treat symptoms, instead of really dealing with the root of loan indulgence!

Then the Senator, being in Texas, makes the “no more taxes” argument:

“…because the bonds used to finance these loans are repaid by those who borrow the money, Prop. 2 will have no impact on our… taxes…”[2]

While taxes will not go up what she ignores is that there are costs to this proposition; opportunity costs. As stated by Economist David R. Henderson,

“When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie… you can’t spend the money on something else.”[4]

Opportunity costs are based upon the principle that when a resource is used for one purpose, it cannot then be used for another. It’s basically what opportunities we will loose. In the case of higher education bonds, the money lent to the students is not available for four years or more. This money might have gone to a plethora of other venues such as improving roads, lowering taxes, improving policing abilities, and so forth.

The question we have to ask ourselves is this: are there better things we could be doing than manipulating the student loan market? I strongly believe that there are. So, for the sake of student responsibility and for a wise, economical, investment of government resources, I strongly and respectfully urge Texans voters to vote against proposition 2.


[1] Approved Prop. 2 ballot language: “The constitutional amendment providing for the issuance of $500 million in general obligation bonds to finance educational loans to students and authorizing bond enhancement agreements with respect to general obligation bonds issued for that purpose.”

[2] Judith Zaffirini. “Keep college within Texans’ reach” Austin American Statesman (October 4 2007).

[3] Cited in: Sandy Baum. “The Role of Student Loans in College Access” (Pathways to College, January 2003):5. p 1.

[4] David R. Henderson. “Opportunity Cost” in The Concise Encyclopedia of Economics. (Library of Economics and Liberty, 2002).