The Advantages of Student Loans: Exploring the Rising Cost of College Tuition in America

The labor market in America is changing. It has been getting progressively more difficult to find employment. As a result, parents, teachers, and politicians are constantly stressing the importance of a college education to kids. However, since college graduates are even struggling to find a job, a debate has arisen of whether it is worth it to pursue higher education. One thing that most can agree on though, is that college tuition has risen to exorbitant levels.

In effort to make college affordable and accessible, the federal government implemented a federal lending policy that is continuously getting more aggressive. However, legislators have failed to recognize the unintended consequences resulted from the good intentioned system. The program designed to give everyone an opportunity for higher education, has driven college tuition and piled up student debt while only benefiting the colleges.

Federal student loans were first introduced to the US in 1958 when President Eisenhower signed the National Defense Education Act. At the time, the government was mandated to show each loan made as a loss, therefore the budget rules limited the amount of loans to be made. As a result, in 1965 legislators implemented guaranteeing private loans made by banks.

Order custom essay The Advantages of Student Loans: Exploring the Rising Cost of College Tuition in America with free plagiarism report

450+ experts on 30 subjects Starting from 3 hours delivery

Get Essay Help

In 1993 they decided it was necessary to get more involved, so a bill was passed that introduced direct lending, which had the Department of Education directly originate loans. Direct loans grew increasingly more popular in colleges and students versus guaranteed loans. Through 2010 the use of guaranteed loans diminished, and President Obama ended the practice of guaranteeing loans all together with the notion that direct loans are more cost efficient.

Today, federal loans take up 90% of the money borrowed by students to go to college, private loans being the other 10%. The most popular type of federal loan is Stafford loans, which can either be offered in subsidized or unsubsidized. In subsidized loans the government will pay the interest while you are in school, and in unsubsidized the interest accumulates while you are in school. The interest rates on these are currently near 3%. These low rates that all borrowers will have, are one of reasons federal loans have such high popularity. Aside from Stafford loans, there are Perkins loans, Pell grants, and tax credits, all of which have totaled $169 billion in 2012.

One of the main advantages that is seen through federal loans is that there are minimal, if any standards for qualifying for the 'one-fits-all' loan, where all the terms are the same. The most crucial standard that the federal loan program ignores is credit of the borrower. The Wall Street Journal quotes a students' easy experience obtaining a student loan from the government: Ruben Medrano, a 52-year-old undergraduate studying business management at Texas A&M University-San Antonio, said taking out about $26,000 in federal student loans was much easier than taking out an auto loan or a mortgage. "The last vehicle we purchased, we spent four to five hours in the dealership," Mr. Medrano said. "The student-loan process took me 30 to 45 minutes and I never had to leave my home."

Credit history; used to determine the likeliness of the borrower to pay in the future, is crucial to set terms of any sort of loan. Overlooking it will give a bankrupt borrower with thousands of dollars in late payments the same loan terms that someone with perfect credit will receive. The program ignores credit history in attempt to be fair, however the reality is far from it.

A common argument in favor of ignoring credit history is along the lines of 'the borrower will go to college and be in a different financial situation than before, therefore their credit history now is irrelevant'. While this could be true, the government wouldn't know because there is no assessment of their degree and income after graduation, and no academic standards to federal loans. The bankrupt borrower with thousands in debt may also be majoring in art history with a 2.4 GPA, and they would receive money just as the engineer major with a perfect GPA would.

More than 40% of the loan holders won't even graduate within 6 years. This means someone who takes 6 years to graduate but ends up dropping out will receive more financial aid than an A student that graduates in three. Students receive such a huge sum of money to only spend on average less than 30 hours a week on all academic activities, for only about 30 weeks a year (Arum). The federal loan program claims funding the production of college graduates is an investment to our economy, however in most cases it only does the opposite.

As a result of the 'easy' federal loans, 1 in 3 federal student loan holders will default at the expense of the taxpayers, unlike the colleges who will suffer no financial consequences. The appeal of federal loans to prospective college students, their parents, and even politicians, is minimal on how colleges view them. The colleges look at them as something that's able to make their business model risk free and reward unlimited. They see that any student is now being able to borrow unconditionally, so they raise tuition accordingly. When they raise tuition, the government will hand out more loans to students. It's an endless cycle that Federal Student Aid is feeding.

College tuition in the 1980s would cost around $5,900 today. At the time, where government was not involved in higher education, college tuition increases were near the rate of inflation at around 3% a year. Since the direct loan program was implemented in 1993 college tuition has grown from $6,500 to $22,000 today, a 238% gain while inflation has only risen 53%. Additionally in 1993 all federal college funding totaled $25 billion, and in 2012 it totaled $169 billion, a whopping 576% gain with a precise correlation to the tuition gain.

Another problem with the government being involved with student loans is what they believe will benefit the students, hurts the system and in the long run the students. For example, in April of 2012, Obama, with the support of seven million borrowers that would be affected, urged congress to extend 3% interest rates on Stafford loans to prevent them from doubling. "The number one thing Congress should do for you, UNLV, right now, is to stop interest rates on student loans from doubling at the end of the month," he proclaimed on his college tour.

At the time, both sides of the aisle could agree this had to be done, Democrats and Republicans. When some congressmen voted "NO", they were sentenced to constant media attacks, because they were "anti-education". The public saw no reason whatsoever for someone voting against keeping interest rates low for students. According to Daniel de Vise, if politicians were more like good parents, they would all say no. Good parents say no for a child's good health and development, even if the child cries. Congress must say no to keeping interest rates extremely low, to prevent damage that would affect millions of students, not just say yes to gain public support.

The trouble with having interest rates too low on college loans can be clearly illustrated by looking at the last economic meltdown America faced, also known as the "Housing Bubble". As they are pushing 'affordable education' on kids now, the government was pushing cheap homeownership on families. To do this, they imposed lower interest rates for home loans in order for more people go out and finance a new home, just as they are making student loan interest rates low. Too many people rushed to buy homes that couldn't afford it, housing prices skyrocketed as a result of the demand, and eventually, housing prices came back to reality, causing the "Great Recession". The same thing is occurring with tuition. If interest rates rose to normal, colleges would be forced to lower tuition to keep kids enrolling.

With all the new money spent on higher education, colleges have obviously been the recipient's. But these colleges are non-profits; hence they can't make a profit. One may believe that in the case of receiving excess revenue, they would lower tuition. This has clearly not been the case. In 1980 Howard R. Bowen a well-respected economist and president of three different colleges proposed the Bowen's law, which states, "Colleges raise all the money they can, and spend all the money they can raise."

They are spending for just about anything is justifiable to them "in the name of reputation and the pursuit of knowledge" (Fried). Tuition easily covers the full cost of an undergraduate education, giving colleges excess profit. Typically, the colleges spend this on other education initiatives and research. The federal government loans to students have allowed schools to consistently earn increasing profit.

Federal loan holders are taking a beating from the same system that is supposed to be there to help them. Total student debt has just passed $1,000,000,000,000, or $1T. Two out of three student's graduate with on average $27,000 in debt. Students are expected to enter the "real world" after college, but most can't. They can't afford to live, so 45% of graduates go back to live with their parents. There only focus can be paying off the student loans, because not only does the debt affect their credit, "If you default on your federal loans, the government can seize tax refunds, garnish your wages, and take a portion of Social Security payments-all without a court order" (Equal Justice Works).

It's not only kids being affected; there are 2.2 million seniors over 60 that still hold student loans (Equal Justice Works), which forced the government to garnish the checks of 115,000 retirees. Additionally, it's negatively affecting the poor, despite that a main goal of the federal loan system is to assist the poor in having the same opportunity for higher education. However, Bloomberg's Richard Vedder found that "federal-aid programs have been accompanied both by rising income inequality in the U.S., and a decline in the proportion of recent college graduates from poor families.

Not only have federal student loans hurt college students; they have been inflicting damage on our economy and the taxpayers. Student debt, just passing $1 trillion, has been dragging down our economy. Furthermore, loans in 2011 used $104 billion of taxpayer dollars to originate, and if the student defaults or even if interest rates rise, it will be the taxpayer that will take the blow (Vise). The higher tuition gets, the more loans the government will hand out, and the more students will continue to not payback, ultimately charging the taxpayers. Some legislators have even tried to make it worse for taxpayers.

Representative Hansen Clarke of Michigan's 13th district has proposed a bill that would allow students to be able to wipe their debt away. In the Huffington Post he states: This month in the U.S. House, I have proposed H.R. 4170 -- The Student Loan Forgiveness Act of 2012 -- which would eliminate many of the awful consequences of educational indebtedness. In doing so, it would give Americans greater purchasing power, helping to jumpstart our economy and create jobs.

Without any consequences, it would be great to wipe away the debt of college students. However the consequence damages the innocent taxpayer that was not the one to knowingly enter an agreement to pay back a sum of money. Clarke fails to recognize that one can not simply 'eliminate debt', only transfer it and in this case it would go to the citizens that have probably already had their fair share of paying back student loans.

The most obvious solution that Americans need to restore the education system is to end government's involvement in the student loan industry. Doing so would eliminate the harsh consequences that spike tuition, leave students with piles debt, and drag down the economy. People like to point out that the majority of college students could not pay for college without loans. They believe if federal loans didn't exist those students would just not go to college. If that was the case tons of colleges across the country would sell everything, fire everyone and just show down. However, it's not. If students couldn't borrow so easily using federal loans, universities would be forced to cut costs and be price competitive, like any other business.

Students needing to borrow some money would be forced to take out private loans. Banks are financially conscience, so they will examine every student's situation and give them a loan term accordingly. If an art history major needed to borrow money and had bad credit, the bank would give them a higher interest rate to account for the risk of defaulting. They would work efficiently because banks put their money at risk. Some people worry banks won't lend students money because there lack of credit history. Regarding this, Richard Vedder states "It is amazing how students have no trouble getting credit cards and racking up debt, or little difficulty borrowing to buy a car. Why would college be any different?"

Barack Obama ended the practice of guaranteeing private student loans with the correct notion that banks were making too big of a profit from them, and now we are in the same situation but with colleges profiting off of direct student loans. As a result, students are left to pay back enormous loans with taxpayers at risk of their default. Legislators have recognized the problem, but have only proposed 'solutions' such as lowering interest rates on loans and forgiving student debt entirely, all of which would make the problem worse. Ironically, ending Federal Student Aid, would accomplish it's very own goals of creating college more "accessible, affordable, and attainable for all American families".

Works Cited

1. Blow, Charles M. "Student Debt and the Economy." NYTimes.com. The New York Times, 9 Mar. 2013. Web. 16 Apr. 2013. <http://www.nytimes.com/2013/03/10/opinion/sunday/student-
   debt-and-the-economy.html?_r=0>
2. Clarke, Hansen. "Trillion Dollar Crisis: The Case for Student Loan Forgiveness." TheHuffington Post.com. The Huffington Post, 25 Apr. 2012. Web. 27 Feb.
   2013. <http://www.huffingtonpost.com/rep-hansen-clarke/student-loan-forgiveness_b_1454241.html>.
3. Equal Justice Works. "As Student Loan Grace Period Ends, Consider Options to Avoid Default." US News. U.S.News & World Report, 12 Oct. 2011. Web. 16 Apr. 2013. <http://www.usnews.com/education/blogs/student-loan-ranger/2011/10/12/as-student-loan-grace-period-ends-consider-options-to-avoid-default>.
4. "Federal Student Loan Programs - History." FEBP.NewAmerica.com. New America, 28 Mar. 2012. Web. 16 Apr. 2013. <http://febp.newamerica.net/background-analysis/federal-
   student-loan-programs-history>.
5. Fried, Vance H. "Federal Higher Education Policy and the Profitable Nonprofits." 678 (n.d.): n. pag. 15 June 2011. Web. 27 Feb. 2013. <http://www.cato.org/doc-
   download/sites/cato.org/files/pubs/pdf/PA678.pdf>.

Don't let plagiarism ruin your grade

Run a free check or have your essay done for you

Check my essay Hire Writer