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Educational Loans: The Ever Growing Costs

College tuition is high and still going up. The only way most students can access higher education is by taking huge educational loans. Since the loans need to be repaid after graduation, they may take away significant chunk of future earnings. The inability of many graduates to find employment in the area of their study exacerbates the problem, since those who have to take low skill low pay jobs out of necessity are unable to make payments on their educational loans.

One of the solutions come in the form of the loan forgiveness program, requiring a graduate to work for the government or non-profit organization for 10 years, before their educational loans are dismissed. There are definitely some despaired graduates who take part in this program, but it’s doubtful that their original goal was to be employed on a low salaried government job for 10 years (and probably the rest of their life) just in order to have their college loans dismissed. Moreover, in the conditions of the enormous federal budget deficit, one would expect the reduction in the number of the federal employees, not the increase. The educational loans, dismissed as part of the forgiveness program, are repaid from the federal budget. There are funds allocated specifically for that, but it does not help reducing the government spending.

Free education is not a viable option either. Even if the federal budget would incorporate the new spending, it would require the development of a new and expensive bureaucratic machine, needed to control hundreds of colleges and universities, and ration educational funding. Bureaucratic system is never efficient. What could be considered is a wider system of merit based stipends (not loans) for motivated students. But it needs to be kept strictly merit based, not income based. And it should be limited to the fields of education, that are promising good chance of employment. This will make education free for those who deserves it the most.

In many cases, taking an educational loan and repaying it later is acceptable. What is unacceptable, is the size of the loan, necessary to pay the tuition. Repaying a small and low interest loan would not an issue for majority of people. So, the real question is why the college tuition is so high. The current cost of education does not reflect its value anymore. What if easy availability of loans is the reason of high tuition? What if availability of abundant money encourages inefficiency of schools in distribution and use of resources?

The article Has college financial aid totally backfired? reports:

“Increased availability of financial aid accounted for 40% of the jump in tuition costs between 1987 and 2010, according to a working paper released this month by the National Bureau of Economic Research, a Cambridge, Mass.-based private, nonprofit economic research organization. When you add declines in student loan interest rates as well as expansions in grant aid, the increased access to federal aid accounts for more than half of the jump in tuition, said Aaron Hedlund, an economist at the University of Missouri and one of the authors of the study.

The expansion in federal aid over the past two decades was the “biggest single factor” in tuition growth during that period Hedlund said. “If that was the only thing that changed, tuition would have risen quite a bit,” he said. In fact, for every extra dollar available to students in subsidized federal aid, colleges raise tuition by an estimated 65 cents on average, a separate staff report released by the Federal Reserve Bank of New York concluded last year. That study focused on changes in tuition patterns after Congress increased borrowing limits in the mid-2000s.

The study, which Hedlund wrote along with Grey Gordon, an economist at Indiana University, adds to a growing body of research indicating that making more federal financial aid available to students pushes colleges to raise their tuition. The most famous advocate of this theory is William Bennett, a Ronald Reagan-era Secretary of Education, who in 1987 argued that increases in federal financial aid “have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.”

See also:

Cost of Higher Education. Where Exactly is the Fraud?

Has college financial aid totally backfired?

Michael Moore asks borrowers to imagine a life without student debt