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Should We Stop Referring To Student Loans As ‘Financial Aid’?

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Should We Stop Referring To Student Loans As ‘Financial Aid’?

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I’m not sure what “normal market” means here, but many kinds of markets, perhaps even all of them, aren’t constrainted by disposable income. Major, long-term debt fuels all kinds of important purchases, from houses to cars to health care to big-ticket durable goods. Events like retirement or having kids are dictated by longer-term savings decisions. Much of your monthly spending, like your rent or your cell phone, is in a contract that stipulates some future payments must be made regardless of your disposable income. There’s a reason economists talk about spending as influenced by lifetime incomes.

Student loans are a way of mitigating a credit constraint, which is different than providing aid. Here it reflects not subsidized demand, but actual demand smoothed over a long time period. That’s going to put a lot of demand into play. It shouldn’t surprise us that demand is very high when credit constraints are removed. Higher education is one of the most important mechanisms of social and economic mobility we have, and it is also one of the primary ways we have for people to fully develop their talents and capabilities.

If actual demand overwhelms the supply of the system, that’s a problem of supply, not demand. And the obvious solution is to increase the supply. Throughout our country’s history we’ve done that in landmark bills that do it through public provisoning paid for by taxation, bills like the Morrill Act and California Master Plan. Now, as that system is left to crumble, we are looking to the private, for-profit sector to fill that gap. I fear that will only exacerbate the cost problems we’ve seen so far, and the data is looking that way too.

But if not as a form of financial “aid,” how should we refer to student loans?

[1] There’s a narrow, though important, question about whether or not student loans are a “subsidy” because their interest rates are too low or too high. The Department of Education found that (R-10) for ”Direct Loans, the overall weighted average subsidy rate was estimated to be -13.91 percent in FY 2011; that is, the overall program on average was projected to earn about 13.91 percent on each dollar of loans made, thereby providing savings to the Federal Government.” What’s a good word for the opposite of a subsidy? Whatever it is, student loans are that. Others argue that there needs to be a higher discount rate used to calculate this, and then you would see a subsidy. Let’s assume for this post that the interest rate is seen to be fair by all parties.

Cross-Posted From Rortybomb

6 Comments

  1. CPANY September 17, 2012

    I believe that all education in America should be free to citizens, but that college education should be available only to those intellectually qualified.

    Reply
    1. SaneJane September 17, 2012

      Isn’t that what entrance exams are for? If a person can absorb information and get a passing grade they can benefit. College education can mean a lot of different things but you support a system limiting it to those who have prior advantages.

      Reply
      1. CPANY September 17, 2012

        What “prior advantages”? Brains? Intelligence? The student’s ability to stay in college, with all costs paid by the government including living expense stipends, will depend on his or her high grades on the entrance examination and his or her ability to maintain high grades while in college. That will ensure that our educational dollars are being well spent on the superior students who show dedication and intelligence.

        Implicit in this is that college curricula will be rigorous, so that only the best will graduate.

        The less intellectually qualified won’t be precluded from college, but they won’t receive the government assistance. They’ll have to pay for their educations.

        Reply
  2. Dominick Vila September 17, 2012

    Student loans are definitely not the same as financial aid, which could be construed as a grant or gift to help a bright student without the financial means to pay college tuition get the education that he/she needs to succeed in the 21st century. Student loans, regardless of how much time a student has to repay it and how low its interest rate may be, discourages higher education inasmuch as many students refuse to be burdened with debt when they don’t even know if they are going to find a job when they graduate or make payments while they are struggling to make ends meet on salaries that are often barely above the minimum wage.
    This is far from being a trivial matter. The reason so many job vacancies remain unfilled in the USA, or are filled by foreign professionals, is because other industrialized nations are providing free education to bright students, with special emphasis on hard science. BTW, the problem is not our schools or universities, all we have to do is look at the number of foreign students attending our universities to realize that our institutions of learning are second to none. Unfortunately, those that see socialism behind every attempt to lift the middle class out of the rot we are in and narrow the financial gap between the very wealthy and the middle class, will continue to do everything they can to maintain the status quo. The obstacles that prevent or discourage many bright young Americans from pursuing a college education is probably the single most important issue in the USA today, because of its long term impact, and very few people pay any attention to it.

    Reply
  3. johninPCFL September 17, 2012

    Excellent discussion up to the point where: “If actual demand overwhelms the supply of the system, that’s a problem of supply, not demand. And the obvious solution is to increase the supply. ” In the real world, when supply fails to keep up with demand, prices increase. This upward rise in prices by the offerers is stopped only when further increases in price shed more accepters because the cost is deemed (by the accepters) too high and total dollar volume (or profitability) for the offerers falls.

    Another issue wrapped up in the discussion is that the supply of higher education is not infinite, nor can it be. Therefore, when more money becomes available to the accepters (whether through gifts or loans), the price from the offerers can increase because increasing the price does not reduce the dollar volume. This leads to another, higher price point where the accepters ultimately again decide that the cost is too high. The lower the loan’s interest rate, the higher the point to which the new price may rise.

    Reply
  4. howa4x September 17, 2012

    In most other industrialized countries higher Educationis either free or minimal cost. Only here where everyting including health care is a for profit system where some groups make billions off the transaction. How are we going to compete and grow the ecomony if we sadle a whole generation with this debt? How are they going to buy all the cars and houses we need them to buy to keep our economy moving if they are in deep debt prior to starting out? Is it a wonder then the trend now is for these young people to come home to live with their parents because they can’t afford rent. That means as each sucessive generation gets in debt they will contribute leass and less to our economy. Another issue is why would I go 50K in debt for a job that only pays 25,000/yr. Why even go to college? We as a society need these people to go out and create new industries and have new ideas. It dosen’t say much for college when some of the wealthiest didn’t even finish or go at all. Bill Gates left as a freshman, and Steve Jobs never finished.
    The Reality is if we want to be competitive in the future we need to make higher ed free or minimal in cost. We have to stop this nonsense that only the banks can make a lot and look out for the good of the country. This is the only loan you can’t go bankrupt on, thanks to the republicans and the banks. If we are financially killing off the future how are we going to survive?

    Reply

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