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April 4 2012

Nationalizing Student Loans Not Working as Planned

Vicki E. Alger

Student loan debt now surpasses $1 trillion—more than Americans owe on their credit cards and cars—and it’s projected to grow $100 billion annually.

Project Student Debt reports the average college senior’s debt burden exceeds $25,000. Meanwhile, the unemployment rate among recent college graduates reached a record high of 9.1 percent in 2010. No wonder default rates are on the rise.

Government-run student loans were supposed to fix this state of affairs, including the Ensuring Continued Access to Student Loans Act of 2008 (see also here, here, and here) and the Student Aid and Fiscal Responsibility Act of 2010.

Since then, controversies have erupted, such as the U.S. Department of Education’s purchasing of shotguns, and its subsequent raid of a California resident’s home as part of a student aid fraud investigation.

A recent analysis by the Council on Foreign Relations (CFR) now finds that student debt could impact the American economy.

“With a pair of new laws in 2008 and 2010, Congress fundamentally changed the student loan market, making the U.S. government the sole supplier of Federal student loans, rather than just the ultimate guarantor.  In itself, this does not affect the government’s net debt,” noted the CFR. “This new direct lending does, however, add to the gross debt held by the public.  The $1.4 trillion in direct federal student loans that will be outstanding by 2020 will amount to roughly 7.7% of gross debt.  This is 6.3 percentage points higher than it would have been had the scheme not been nationalized.” 

Given that average in-state college tuition rising more than 8 percent last year alone, it’s time to acknowledge that more “free” government money will not make college more affordable. As the Center for College Affordability and Productivity’s Jonathan Robe recently quipped:

“Christopher Bullock got it all wrong, at least as far as 21st century America is concerned. It is simply not true that nothing is certain except death and taxes: tuition increases surely are just as likely.”

The feds nationalized student loans under the guise of eliminating the middle man to keep college costs down. A better approach would be taking lump-sum government appropriations currently directed to higher education institutions (which often wind up subsidizing bloated administration), and redirecting those funds as grants to students. Institutions would receive their funding only if they attracted and retained students (by keeping their programs efficient and affordable). Students would have to successfully complete their programs and finish on time or their grants would convert into loans that they would have to repay.

Better incentives and personal responsibility are the cornerstones of sound public policy. But it appears many policymakers in Washington, D.C., haven’t gotten the memo.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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