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U.S. Student Financial Aid Programs Receive an "F"

Jared Meyer | 10/18/2013 |

Now that the government is open for business, it is time to refocus on the explosion of student loan debt. Standing at over $1 trillion, this issue should no longer be ignored. 

For the almost 40 million people who have student loan debt, the average burden is just under $25,000. There is a default rate of 9 percent within the first two years, and the overall delinquency rate is 15 percent. 

The number of borrowers owing between $50,000 and $75,000 has doubled since 2004, and the number of people owing more than $200,000 has tripled. During that time, overall student loan debt increased by 280 percent, while all other categories of non-housing debt decreased by 5 percent. Maybe this explains why Wells Fargo found that one third of Millennials regret attending college.

Student loan debt is a systemic problem, requiring Congress to think beyond ordinary solutions and put everything on the table—including the government’s $169 billion annual programs of Pell Grants, student loans, and tax credits.

These programs were originally meant to help low income students afford college education. But now the percentage of low income students going to college is smaller than it was 40 years ago. The program has failed to fulfill its mission, partly because government financial aid programs have raised the costs of higher education. Tuition costs have increased over 1,100 percent since records began in 1978. In comparison, the cost of food has risen by 250 percent over the same period. 

Automatically providing these funds through the government (how the system has worked since 2010), or at low rates subsidized by the government, creates an overstated demand for college education. This allows schools to raise tuition costs exponentially. The U.S. Treasury Department found that for every dollar provided in tax-based aid, scholarships fell a dollar—shifting the burden from students and schools to taxpayers. 

There is little harm done to a university by accepting or admitting federally subsidized underqualified students who do not graduate. The school still receives tuition payments, and, if students drop out, other misled freshmen can easily take their places (and funding) next semester.  Many universities do this, and over 40 percent of students receiving financial assistance from the government fail to graduate within 6 years. 

The harm is instead done to those students led to believe that a four year college or university was for them. They were told they would win the lottery by going to college, but they end up in debt, with no job. College should be an investment, and people making this investment should expect to make a return high enough to recover the principal amount plus interest payments.

If students want to spend their time theorizing about whether Harry Potter is real, an actual course at Appalachian State University, that is fine. However, it is clear that studying these types of topics is not an investment in any traditional sense of the word. It is rather consumption, and should be treated as such. Taxpayers should not be called upon to subsidize young adults’ personal consumption, especially when doing so does not benefit the economy.

The rationale for using taxpayer funds to pay for higher education is that students will later put the knowledge and skills they acquire to use for the betterment of society. When this fails to be the case and students cannot get a job upon graduation, either because they are poorly advised and choose the wrong major or do not work hard, something has to be changed. There are more beneficial ways to spend the $8,000 it can cost per class at a private university.

Brookings Institution scholars Isabel Sawhill and Stephanie Owen found that the average return on investment from college is positive. However, this is not universally so. Students’ choices of major and school have significant effects on future earnings and loan repayment potentials.

Many students do not consider labor market demand when choosing their major. This could be why 54 percent of recent college graduates are either under-employed or unemployed and 115,000 janitors have college degrees. George Mason University economist Alex Tabarrok notes that while 50 percent more students are in college now compared to 1985, the number of microbiology and computer science majors have not increased. The question remains, how can these jobs, or lack of jobs, lead to repaying massive taxpayer-provided debt? The answer—they cannot.

It is important to raise student awareness about costs and benefits of different majors and colleges by making more information available. On this note, President Obama renewed his calls for significant reforms to financial aid in August. He wants government to stop providing money to colleges that are not offering students returns on their investments. The amount of aid and rates students could borrow at would be tied to an institution’s ranking. The ranking would be based on their tuition costs, scholarships awarded, outstanding loan debts, graduation and transfer rates, and graduates’ earnings and career prospects.

The President’s proposal is far from perfect, but at least it is a start. Congress could use an opportunity such as this, where both sides of the political spectrum understand the need for reform, to work together on an intricate solution to a complex issue. This will take time, but why should they not? After the debt ceiling drama it is not possible for their approval ratings to fall any further.

While President Obama has the right idea on fostering competition between colleges for federal money, his plan could be further improved. Instead of only tying federal funding to the school’s performance, taxpayer-provided money should also vary depending on the ability of the student.

Currently the same interest rate (3.86 percent for direct loans) applies to everyone regardless of future career prospects. Tying the rate paid to past academic performance—in high school, community college, or university—would provide an incentive for students to pick schools that better fit their skill sets, potentials, and abilities to pay. The rate should also depend on what major students select, as to better correlate with repayment potential. This would control the amount of student debt, increase graduations, and lead to higher repayment rates.

The government’s $169 billion a year programs of Pell Grants, student loans, and tax credits have failed to fulfill their original mission of helping low-income students attend college. The current system is unfair to students and taxpayers and needs reform.  Members of both parties should be open to building upon common-sense solutions. After all, America’s future prosperity is at stake.

 

Jared Meyer is a research associate at the Manhattan Institute for Policy Research

 

 


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