Student Loans | The One Trillion Dollar Misunderstanding | Student ...

At the beginning of 2011 the portfolio of the federal government for education loans was nearly one trillion dollars. The portfolio consisted of loans for students currently in college extended either directly by the Department of Education or loans from financial institutions like Sallie Mae and banks with repayment guaranteed by the United States Treasury as well the education loans of students who had graduated from college or had quit before graduating but had not been fully repaid. Its size exceeded the credit card debt of the American population in early 2011 and it continues to grow; whatever part remains unpaid contributes to the national debt.

An optimist views the large portfolio of student debt as ?no problem.? After they graduate, nearly all students will pay off their debts gradually, although they may have to live frugally in order to do so. A pessimist views student debt as likely to be a permanent drain on taxpayers, as upwards of 40 per cent of borrowers will ultimately default on their loans or die before paying them off. Meanwhile the portfolio of federal student loans will continue to grow.

This pessimistic prognosis for student loans rests on the assumption that loans were often given to the wrong students for the wrong reasons and still are. Pessimists believe that the existing student loan program has become unsustainable, as the subprime mortgage lending program was unsustainable, because of imprudent risks. The risks were imprudent because of two main misunderstandings:

The misunderstanding many students have of the difference between grants, such as Pell grants, which are taxpayer gifts awarded to college students who can demonstrate financial need, and loans, which must eventually be repaid ? with interest. Contributing to this misunderstanding is that both types of federal financial aid are funneled though campus departments usually called ?Office of Financial Aid.? These offices assemble for students a financial ?package? covering current college expenses including parental contributions, student earnings, grants, and loans. The time when repayment of the loans must begin is nine months after graduation ? for many students, in the almost unimaginable future. Students didn?t realize that the burden of large student loans could be justified only if they have a realistic chance of high future earnings from employment.

The misunderstanding that most parents and politicians have about higher education as an investment in future careers. Many students regard a college education that way also, but for a large minority of students college is not investment but consumption: four fun-filled years before they have to settle down to a life of adult drudgery. That is why many enroll in courses they hear are easy, fail to do the required reading, and come late to class and leave early when they attend the class at all. For such students, college is a time-out or in the words of psychiatrist Erik Erikson, a ?psychosocial moratorium.? Do students, parents, and lawmakers really want students to incur burdensome loans that must be repaid later ? or defaulted on ? to finance a psychosocial moratorium?

Is the High Default Rate a Virtue?

True, it is not possible to predict precisely which students are likely to repay their student loans and how quickly they can do it. But ignoring the likelihood of students being able to repay their loans invites similar problems to those attributable ? at least partly ? to bankers who did not require applicants for mortgage loans to make down payments, have good credit histories, and produce evidence of earnings from employment. What evidence is there that bankers are capable of distinguishing students likely to pay up from students likely to default? The most compelling evidence is the much lower default rate of private bank loans to students compared with federally guaranteed student loans. After all, the history of banking ? and the profitably of most banks ? attests to the ability of loan officers to distinguish good risks from bad ones.

This lower default rate of private student loans does not impress liberals. Liberals regard the higher default rate of the federal student-loan program as a virtue. What the Department of Education does now is to give loans to every college student who demonstrates financial need without examining evidence of academic ability and other criteria of credit-worthiness. From the liberal standpoint, this policy provides crucial educational opportunities to young people from low-income families. Liberals are willing to have taxpayers pay for the higher default rate in

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