Student loan debt is a critical concern for the economy, to say nothing of the students and graduates that hold it.[1]Student loans are made solely for the purpose of financing higher education;[2]that is, they are designed to help students pay for college tuition, books, and living expenses.[3]It is the intention of this discussion to examine the issues affecting the Student Loan Program(s), and offer a recommendation to address the programs most deleterious effects.
Research indicates the increased usage of student loans has been a significant factor in college cost increases.[4]Some authorities such as the noted economist George Gilder has call the program a “scam.”[5]
The following data for the past 20 years (1997 - 2017) speak for themselves:[6]
- The average tuition and fees at private universities have jumped 157 percent.
- Out-of-state tuition and fees at public universities have risen 194 percent.
- In-state tuition and fees at public universities have grown the most, increasing 237 percent.
- The total consumer price index inflation increased, for the same period by 52.7 percent (August 1997 to August 2017), according to the U.S. Bureau of Labor Statistics.
The rise in student loan borrowing per person reflects to a large extent the rising cost of higher education that has been going on for over a decade. That begs the question, why has Higher Education costs risen so precipitately?
At public colleges and universities, rising spending on: faculty; administrators; tumefied esoteric curriculum; student support services; and the need to make up for reductions in government subsidies, has generally driven up tuition. Additionally, the federal government imposes no direct borrowing limit. If a school sets tuition higher and higher every year, a government guarantee loan will cover the increase. Accordingly, schools have little interest and no incentive in keeping down costs. Moreover, studies have found that in some cases, such as at community colleges (which educate about half of the nation's college students), tuition have raised while spending on classroom instruction has actually fallen.[7]
Government control of the student loan program destroyed the integrity of the system by which loans are lent based on suitability of the borrower. Normally, or what economists call the Perfect Capital Market; the factors that affect a lender’s decision about whether to extend a student loan will thus be the opportunity cost of the funding (the interest the lender could have earned on other loans) and the riskiness of the gains (mainly due to the uncertainty about the borrower’s income). Therefore, these conditions are not met when government guarantees and/or holds the borrower’s indebtedness.
The federal government has become the dominant supplier of student loans, first through its loan guarantee programs and more recently through direct loans.[8]Now with government authorization, there is no consideration of worthiness. It is simply guaranteed. Moreover, the fact that government has a history of involvement in Higher Education[9]is not ipso facto justification for its ‘predatory’ loan program. However, the only guarantee result is that the US Taxpayer will be left holding the bag. Hence, the risk of massive default provides a valid comparison with the Savings and Loan Crisis (S&L) 1980s and 1990s, and Subprime Mortgage Crisis of 2008.
Some critics of financial aid claim that, because schools are assured of receiving their fees no matter what happens to their students, they have felt free to raise their fees to very high levels, to accept students of inadequate academic ability, and to produce too many graduates in some fields of study. About one-third of students, whether or not they graduate or find jobs that match their credentials, are financially burdened for much of their lives by their debt obligations, instead of being economically productive citizens. When, not if, those former students default on their obligations, the burdens are shifted to taxpayers.[10]
The point is made, that the cost of higher education, being past on to parents and students, has been outrageous. Simply "forgiving" the debt would be absurd public policy for multiple reasons. However, I would posit there is an alternative that relieves some of the pressure on parents and students.
Reduce the debt by “sequestration” of part of the debt from universities, colleges, et cetera that are responsible for this egregious situation. It should be said that any sequestration program would require strict guidelines as to where and how program cost reductions can be made, therefore guarding against the inevitable use by schools of a ”Washington Monument” strategy.[11]
One further point should be made. In fact, there is a precedent. In 1967, I was an undergraduate student at the University of
Wisconsin – Madison. I had a student loan(s). Out of the blue, the University
notified me that I was awarded a one-time financial aid award that could be used
to reduce my existing loan, or taken to meet other obligations. Hence, a
mechanism to reduce a student loan obligation is not without precedent.
In the last analysis, it’s time students, and their parents, are given relief from this onerous and severely flawed aid program. The federal government should not be in the student loan business, and needs to end this government largesse to the Higher Education Establishment.
[1]According to the Census Bureau, college enrollment as a fraction of the population between ages 16 and 25 rose from 34 percent in 1990 to 51 percent in 2010.
[2]Higher Education is defined as colleges, universities, community colleges, and technical schools.
[3]Wenli Li, “The Economics of Student Loan Borrowing and Repayment,” Federal Reserve Bank of Philadelphia, Business Review Q3 2013.
[4]David O. Lucca, Taylor Nadauld, and Karen Shen (July 2015). "Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid programs" Federal Reserve Bank of New York.
[5]George Gilder, “Live, Liberty, & Levine,” Fox Cable News Network, October 14, 2018.
[6]Briana Boytington, “See 20 Years of Tuition Growth at National Universities,” U.S. News & World Report, September 13, 2018.
[7]Steven Hurburt, “Trends in College Spending,” 12 January 2016, The Delta Project, The American Institutes for Research (AIR), 1000 Thomas Jefferson Street NW, Washington, DC.
3Prominent arguments for government involvement are that social returns to education are greater than private returns. Furthermore, employers tend to under invest in generalized training, since they do not fully capture the returns in the event the trained employees leave the firm. Cited in Wenli Li, “The Economics of Student Loan Borrowing and Repayment,” Federal Reserve Bank of Philadelphia, Business Review Q3 2013, P.2.
[9]The modern student loan program dates to 1965, when the Guaranteed Student Loan, now known as the Stafford Loan, was introduced.
[10]Vedder, Richard; Denhart, Christopher; Hartge, Joseph (June 2014), “Dollars, Cents, and Nonsense: The Harmful Effects of Federal Student Aid,” Center for College Affordability and Productivity, retrieved November 23, 2014.
[11]A Washington Monument strategy is a tactic employed to avoid program cuts by finding the most essential, popular and visible programs and services to cut, instead of the superfluous. First espoused in Aaron Wildavsky classic book: Wildavsky, Aaron. “Politics of the Budgetary Process,” Boston: Little, Brown & Company, 1964.
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