The Student Loan Problem

With the fabled and much anticipated “Senior Year, Second Semester” now upon the class of 2013, seniors have begun pondering the means through which they will pay for college. For the blessed ones, the answer comes as easily as ensuring that they simply don’t enrage their parents to the point that their trust fund is emptied. For the majority of Bell seniors, and indeed the majority of college students, the only realistic course of action is to borrow a sum of money from a source, most likely the federal government, in the form of a student loan; and with the deals being offered in federal loan money, why not? Well, with a quick analysis of student loans and their effect on college the problems inherent with the government loans become apparent.

How will you pay for college?

A popular feature of of the program, for obvious reason, is that practically every American student qualifies for a student loan. Along with being accessible, the loans themselves offer conditions that, by private sector loan standards, are incredibly generous; a student is not required to pay while in college, after he/she graduates the student pays a minimal interest rate, and if everything goes according to the government’s plan, they will accomplish full payment of the loan over a period of either 10 or 25 years (depending on one’s student loan payment program). With such a favorable plan and the resulting opening of access to college for all income groups, the question becomes: “What is the problem with higher education; why are tuitions rising so quickly and why are half of the college grads these days out of work? [3]”

The predicament of tuitions is explained by the impact of the higher demand (students) on the supply (college education) caused by the funneling of federal funds into student loan programs. It is undeniable that federally financed student loans raise the amount of students applying for college. But, what is the effect of the increased amount of students on colleges? A college, say Harvard for example, is presented with rising amounts of college applicants who now can comfortably afford the school’s tuition due to student loans. Harvard realizes quickly that they can inflate tuitions higher and higher without any repercussions from their students, who tend to see the rising cost as worth the degree, or more specifically the money that degree will lead to. Even if the student ignores the litany of opinions from counselors and teachers who advise taking the loan because “college pays for itself”, the deceptively beguiling terms offered by federal student loans serve to convince many students into taking them.  This process is only made possible through the ever growing amount of funds being allocated to student loans by the federal government. As more and more money is being poured into colleges by the government (through loans), colleges begin investing this money into progressively larger projects to attempt to improve what they have to offer students, an ostensibly noble use of funds, but one that drives educational institutes to raise tuitions to fund ever further development. In a free market, the amount of demand (students willing to pay) would balance out to match the supply (college spots open), leading markets to stabilize and prices to stop skyrocketing. However, the limitless amounts of student loan dollars being offered spur on the ever rising tuition fees and the higher education frenzy.

If rapidly increasing tuition payments are explained by government loans, is the answer the same with the lack of jobs for college grads? The answer, simply, is yes. This phenomenon can be traced to the lack of risk signaling that occurs with the fixing of interest rates by the federal government student loans.  For example, if a student was majoring in Art History, a major that offers lean job pickings, the government student loan would offer him/her the same offer as any other student. A private sector loan would have raised interest rates on this student to compensate for the increased amount of risk that comes from loaning to the student; the loaner recognizes that there are simply less jobs for Art History majors then, for example, economics majors. It is through the use of interest rates that the private sector sends signals to students warning them away from majors that will potentially lead to future default or unemployment while communicating to them which majors are in major need by the economy. Government loans, by political design meant to emphasize “fairness”, avoid the risk signals sent through interest rates and therefore do not de-incentivize unneeded jobs nor incentivize needed jobs. The effect of the lack of risk signals in government loans is stunning in its impact; students, without the incentive of the interest rates, enroll in majors that are not highly looked upon after graduation and find themselves in horrible situations. Let us say that after four years, the Art History major graduates and is stunned to find no museum curator spots open for him; the graduate now has to find a way to pay off debt with what is, in essence, a worthless degree and no real job experience. If the graduate is forced to default on the loan, a legitimate worry for many graduates, his/her credit is ruined. The interest rates on student loans provide a valuable signaling service to college students and allow them to make rational choices based on the signals that the market gives them; the lack of these risk signals in federal student loans lead many students away from needed majors which, after graduation, leads to desperate situations for many students who find themselves without any job prospects and loaded with massive amounts of debt. If the student is forced to default on their debt, their future credit is utterly ruined, practically destroying any hopes of being able to borrow in order to buy a car, home, or start a business; in essence, with the lack of strong risk signals many students are ruined, society suffers the lack of substantial amounts of grads with qualifications, and our government is on the hook for massive amounts of defaulting obligations.

Simply put, Bellarmine grads must make sure to research well what they intend to get into with their means of paying for college. For the grads who have the good fortune to have acquired a scholarship or those who have loving parents willing to pay them through, the question of student loans is not a big one. But for the majority of students, until federal education interference is stopped and the student loan market is returned to the private sector, student loans are the only way to go. While Bell grads might be, and justifiably so, excited about the “next step” in their lives, a good idea to keep in mind is that one can’t be too careful about their future.

Sources

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