Abolition Of College Subsidies To Solve US Student Loan Crisis Essays Examples

The US and global economies are only just recovering from the worst effects of the 2007/8 global economic crisis, which was the single biggest such crisis since the Great Depression. The crisis was caused by predatory sub-prime mortgage lending, inadequate regulation and unsustainable credit expansion due to the emergence of securitized banking. The US has yet another crisis on its hand, which could potentially have a similar effect on the country and the global economy. Student loans reached more $1 trillion August 2013, owed by about 40 million graduates, which means that they comprise the biggest proportion of the total household indebtedness ($11.83 trillion). Other than the fact that youths are burdened by the debt, an estimated 7 million student borrowers, who owe as much as $170,000 each, are already in default (Gage and Lorin 1; Dynarski 1). This paper argues for an urgent abolition of federal subsidies for college education in order to stem the college cost inflation, keep higher education accessible to the poor and most importantly ensure that college education has higher returns than the costs.
The increase in the student loans in the US is unsustainable. While it is arguable that the student population has increased, student borrowing more than doubled between 2001 and 2011 with student enrollment having increased by just 32% during the same period. The size of loans taken out by students also increased, and the main reason for the increasing borrowing is because of the high college fees inflation. While burdening the youth with crippling loans is a moral issue that should concern all Americans, the nature and consequence of student loans as well as college tuition worsens the situation even further. It is expected that higher fees contribute to higher dropout rates and reduce the college enrollment rates because it lowers the expected marginal benefit of college education. Further, according to Collinge (2009), college loan providers such as Sallie Mae have managed to successfully lobby for the removal of many consumer protections on student loans, permitting large penalties for defaulters, which makes such loans more profitable in the event of default. In 1976, for instance, Congress passed a legislation rendering federally guaranteed student loans non-dischargeable in bankruptcy, followed for other laws that lifted statutory limitations on the time for collecting such debt. In 1988, the Federal Trade Commission directed that student loans are exempted from the Truth in Lending Act, and thus debt collectors do not need to adhere to the Fair Debt Collection & Practices Act. Such an arrangement incentivizes predatory lending and ties down students to a lifetime of indebtedness, including the fact that it limits them from other borrowing in the event of defaulting. This has been emphasized by the reduced participation of private lenders under the Stafford Act, and the emergence of private market student lending, which not only preclude forbearance and Pay As You Earn programs, making loan repayment a crippling burden on borrowers. This is not unlike the case with the sub-prime mortgage lending, which drove the US into the 2007/8 financial crisis.
While the unnatural increase in student borrowing is not easy to explain, college fees tuition is a natural contributor to the crisis. Even most importantly, subsidies to public colleges are to blame for the inflation in college tuition, contrary to the expectation that such subsidies would reduce fees. This means that the federal and state governments are not only spending more in college subsidies, but also that the benefits of such subsidies do not accrue to the students at all. In fact, according to Bennett (2012), federal financial subsidies to colleges are mostly responsible for the high college fees inflation, the resultant high dropout rates, and student borrowing. The evidence is compelling. In the year 2010, $133 billion was disbursed by the federal government in student aid, and the amount was increased by 17% in 2011, to reach $157 billion. Additionally, student/college aid in the form of Pell Grants rose from $29 billion to reach $36 billion during the same time, representing a 24% increase. Many public universities also receive substantial donations from alumni, charities and foundations, which have been rising over the years. However, despite there having been only a modest increase in student enrollment rates, public college tuition rose by 8.3% (5% more than the rate of inflation).
It is, therefore, evident that taxpayer are barely getting value for their investments. According to Dynarski (2014), Bennett (2012) and Gage & Lorin (2014), direct subsidies to colleges and student aid/loans result in higher college fees because they encourage wasteful spending by colleges. While investment in educational infrastructure is important, colleges in the US have been cushioned from market forces by generous subsidies, which has in turn fostered non-market spending practices, with the costs being passed on to students. However, since the federal government picks up the bill in return for student loans, or students would simply borrow more to cover the increased tuition fees, the fees inflation cycle has continued unabated. Both the lenders/subsidy providers and the colleges are insensitive to the fees inflation, because in the long-term, the costs are born by the students, who are, however, barely alive to this reality when they borrow. With student loans running as high $170,000, the long-term effect on the more than 50 million loanees is potentially crippling to the economy. Effectively, in order to end this inflationary cycle, it is important that subsidies to colleges are ended completely. This will force colleges into austerity, and re-adjustment of their programs to the market forces, which should in turn eliminate inefficiencies in the US college system. Once colleges realize that students are unable to pay the high fees and that higher fees would simply result in low demand for college education, they will be forced to keep fees low. For instance, unprofitable courses and non-essential research/infrastructure spending will be cut, keeping college expenditure in line with the market demands.
There are other alternatives too, which are not, however, equally sustainable. To begin with, Garcia-Penalosa and Walde (2000) argues that higher education contributes to increased efficiency and equity in an economy, and thus it is overly simplistic to justify college subsidies based on the effect of college tuition. Capital market imperfections prevent higher learning institutions from accessing financing necessary for investing in long-term capital projects such as laboratory equipment, research, and buildings, which ultimately hurts the capacity and quality of education, as well as human capital. America and other industrialized countries have a better capacity in education and human capital because of the investments in education, including through government subsidies. The contribution of this to the economy is considerable. However, Garcia-Penalosa and Walde (2000) found that the traditional system of subsidies where the government collects taxes and uses them to subsidize education does not work because it generates a reverse redistribution of income/wealth. This means that taxpayers pay more tax today to subsidize education that benefits the future generation, which means that wealth is transferred from the current generation to the future generation. Instead, the current system should be replaced by a graduate taxation system, by which graduates that benefit from subsidies pay relatively more in taxes based on their future incomes. This system works better because the outcomes of education are not certain, and it is difficult to predict whether a student who borrows $150,000 would have a large enough income to repay this loan in future. However, by using a progressive graduate tax instead of loans, education will be financed based on the capacity to pay by those that have benefitted.
Dynarski (2014) on the other hand, argues that the current system works perfectly, and the perception that there is a student loan crisis is simply born out of media-driven sensationalism (p. 12). Upwards of 44% od college students never borrow at all, while 25% of the students less than $10,000 to finance their college education. Further, 16%, 8% and 5% of college students borrow less than $20,000, $30,000 and $50,000 respectively. Only less than 2% of the student population end up with college loans of more than $50,000 according to figures from the College Board. Effectively, while it is true that some students have loans of up to $17,000, these are a small minority (most of whom are graduate students), who mostly borrowed from private markets based on their ability to pay. Further, the vast majority of loan defaulters only experience temporary financial difficulties as against a complete failure to repay their loans. Both Garcia-Penalosa and Walde (2000) and Dynarski (2014) make valid points, except there is not harm in transferring wealth to the future generations and while using a graduate tax system is attractive, it does not address the problem of rising college fees and debt levels. Similarly, a well-structured repayment system makes loans bearable to students, but it fails to address a systemic breakdown that has resulted in college fees inflation. A look at Dynarski (2014)’s figures shows possible sensationalism, but it also shows that while many students can afford college education, the poorest students cannot, and this population is worst affected by college fees inflation, however, small the increment is.
Education is necessarily an investment for individual students and the country, not least because it adds to the stock of human capital, which in turn makes for increased productivity and growth. Effectively, governments have a legitimate reason and interest in subsidizing college education in order to safeguard the country’s future competitiveness. This is even more important because private lenders are reluctant to lend to students due to the long-term nature of repayment and the fact that student borrowers do not have any real securities against which to borrow. It is urgent to stem the college fees inflation and the increasing need for student loans. While college education is still affordable to many students (because the US is a wealthy nation), it will increasingly become inaccessible to the poor and underprivileged, which in turn leads to inequality.

Works Cited

Bennett, William J. Stop subsidizing soaring college costs. 22 March 2012. Web. 5 April 2015.
Collinge, Alan. The Student Loan Scam: The Most Oppressive Debt in U.S. History, and how We Can Fight Back. Boston: Beacon Press, 2009. Print.
Dynarski, Susan. "An Economist’s Perspective on Student Loans in the United States." Brookings Institute ES Working Paper Series (2014). Web.
Gage, Caroline Salas and Janet Lorin. Student Loans, the Next Big Threat to the U.S. Economy? 16 Jan 2014. April 2015. <Web>.
Garcia-Penalosa, Cecilia and Klaus Walde. "Efficiency and equity effects of subsidies to higher education." Oxford Economic Papers 52 (2000): 702-722. Web.
Reinhart, C. and K. Rogoff. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison." NBER Working Paper No. 13761 (2008): Web.