In my post earlier this week on the DiscoverScholars.org blog, I presented a rather Austrian perspective regarding the recent collapse of the student loan industry.

As I see it, the over-subsidization of Sallie Mae and more general market meddling by the federal government contributed significantly to the problems we’re now seeing of the loan market. Specifically:

The problem, however, was that demand for such “collaterlized debt obligations” (CDOs) had little to do with the underlying quality of the investments. Due in large part to large federal subsidies, student loan providers looked more profitable than they actually were, leading investors to overlook many lenders’ poor management and questionable accounting.

Recently, however, the instability and scandals in the student loan industry are becoming more widely known among investors. The drying up of demand for CDOs has reduced lenders’ access to investors’ capital, exposing their unsound business practices. The slow realization that the industry needs fundamental reform, rather than more subsidies, is forcing lenders to cope with the consequences of less demand for their products.

One point that I didn’t mention was the role that the Fed has played in the crisis. Because interest rates were kept artificially low by Greenspan throughout the 90s, too much investment cash was chasing too few good investments. As a result, people were more willing to invest in unsound securities than they otherwise would have been.

Of course, this was great if you needed low interest loans to pay for college, but students today are being forced to deal with the consequences of that overindulgence.

All the more reason for DiscoverScholars.org, right?