Opinion: The Student Loan 'Fix' Is No Fix at All

(March 26) -- Bolted to the health care bill is a student loan reform plan that backers say will make college more accessible to students and that critics call a government takeover of the student loan program.

The overhaul may or may not make things better, but what we have now isn't good. But not for the reason either side is willing to admit.

The problem at the center of the current program, and the new program, is the government subsidies themselves. Taxpayers cover a portion of the interest rate and the costs if students default, which they are doing in increasing numbers.

These subsidies sound good because everyone wants young people to have access to college. But in addition to the cost they impose on taxpayers, they can be harmful to the students themselves, turning students into lifelong debtors. And they push up costs, making college increasingly inaccessible for everyone.

Borrowing money has become the standard way to go to college. According to a report by the Education Sector, more than half the students at public four-year universities borrow to pay for college.

On average, students graduate with $23,200 in debt (see chart below). Until our current Great Recession, that load didn't seem so bad. Graduates were confident that they would be able to pay it back. Everyone was saying that college graduates earned a million dollars more in their lifetimes than high school graduates did.

Yet well before the financial crisis of 2008, that number was looking shaky.

Graduates were finding themselves delivering mail, ushering at theaters and working as personal trainers -- jobs with salaries too low to make much headway with loans. And in 2009, a study by the American Enterprise Institute showed the million-dollar figure to be bogus. A lifetime difference of $300,000 may be more like it.

What's more, nearly half of all students who attend four-year colleges don't actually graduate, at least not in six years. They have even less ability to pay off their debt.

Subsidized loans also give students an unrealistic picture of what they will face in the future. (Parents know that many 18-year-olds have an unrealistic picture of economic life, anyway.)

Most students pay nothing as long as they are in college, even while interest is accumulating. And then, after they graduate, easy-payment options stretch out the payback period, generating interest expenses that might otherwise be going toward a car or a home.

Jenna Ashley Robinson, a critic of student loans, recalls her own experience as a student a decade ago. She borrowed an amount based on the one-size-fits-all federal formula, which does not take into account part-time work or scholarships.

Student loan money "doesn't seem real," Robinson wrote in an article for the Pope Center in 2008. "So my classmates and I spent our college-loan money getting the ultimate college experience. We wanted it all: Greek life, study abroad, the newest, coolest flip-flops, Dave Matthews Band concerts and off-campus apartments. And we got it."

She studied overseas, mostly for fun. "I spent my excess money on a semester abroad at the University of East Anglia, where I took few classes and fulfilled no credits toward my major. Instead, I saw shows in London, traveled the countryside and even spent a 10-day spring break in Paris."

Luckily for Robinson, when she got through college and consolidated her loans (that is, combined the loans she had received each year into a single payment plan), her interest rate was low. But for many, that is not the case.

A friend of Robinson's used his extra student-loan money to attend expensive sports events, even traveling out of town, and bought a large-screen TV to watch other games. With so much time spent on sports -- including a job as a local sportswriter -- he didn't get good enough grades to land a quality job.

Years later, he still owes thousands of dollars.

Not long ago, critics made credit card companies a whipping boy on the grounds that they lure students into a profligate lifestyle. But, as Robinson points out, you have to pay something on credit cards every month; you don't pay on your college loan until you have left college. And if the average $3,200 debt on a graduating senior's credit card is substantial, what about that $23,200 debt on student loans?

In addition to the moral hazard the loan creates for the student, there is the impact on the university system. College tuition has been going up faster than inflation for decades -- faster, in fact, than health care. One of those reasons is subsidized loans.

With government loans enabling students to pay more, universities respond by raising prices. Universities are conducting an "academic arms race," explains economist Andrew Gillen. "Thus, when financial aid programs make more money available to schools, this money is spent and results in higher costs per student." That leads to higher tuition, leading to more pressure on the government to supply grants and loans.

Government overhaul or the current loan program? It doesn't really matter.

The reality, which no one wants to confront, is that subsidized student loans are one of the educational system's problems, not one of its solutions.

Jane S. Shaw is president of the John W. Pope Center for Higher Education Policy.

SOURCE: Calculations by the Project on Student Debt from the National Center for Education Statistics (NCES), National Postsecondary Student Aid Study (NPSAS), 1993, 2000, 2004, and 2008 undergraduates, Data Analysis System (DAS).

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