Artificial Demand? and Student Loans for College

Students have borrowed for college almost since the beginning of the college system in the United States.  Sometimes the money was for no more than living or spending expenses and the person loaning the money could be family, a friend, or even the bank.  Slowly and with many good intentions, governments both federal and state decided to subsidize students.  There were many programs but the guaranteed loan programs became the most popular.  These guaranteed programs were, up until 2010, available through private lending institutions under the Federal Family Education Loan Program (FFELP). In this iteration of government subsidized college education, loans were funded by the Federal government and administered by approved private lending organizations.  By underwriting the loans, the Federal government ensured the private lender would assume no risk should the borrower ultimately default.  As noted in last week’s post, the taxpayer or the target audience or taxpayer was/is the ultimate guarantor.

The last administration dramatically increased the subsidizing of college education and in 2010 loan guarantee system through private lenders was discontinued.  All guaranteed student loans are now processed, and disbursed, directly through the U. S. Department of Education.  Additionally, all existing student loans from 2010 and prior reverted to the Department of Education.  This latest version of the student loan system has four versions with varying interest rates, grace periods, and terms of repayment.  The current interest rates run from 3.4% to 8.25%.
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According to the Federal Reserve Bank of New York, the total student loan debt is - $1,407,200,000,000 ($1.41 TRILLION).  That is trillion not billion.   There are over 44 million people with student loan debt with a default rate of 10.7% and the taxpayers are footing the bill for over $100 billion in defaults each year.  Oh and the Average Debt per Student Borrower is $27,857 (studentloans.net 2017).  Just for some perspective, in testimony to congress in 1977 the GAO mentioned typical college student loans as being in the ‘hundreds of dollars’ (GAO 1977).

Just to be clear, the university or college financial aid office administers the processing of student loans and can encourage or discourage students from taking out this federally guaranteed loan (free money anyone?).  However, if the student does not apply for the loans and accept the money, that student may not attend the college or university thus suppressing demand.  Does anyone else see a conflict in interest?  It is not surprising that recently the number of graduating seniors with debt in the federal programs is exceeding 70%.

So while as a society we may be increasing the number of college graduates.  The question is at what cost to society.  You might recall from my previous post that some taxpayers are beginning to question the impact of higher education on society (July 10 Pew Research ).  This Pew survey does not ask what negative impact they see from higher education but it would not seem unreasonable that they worry about the size of the debt, the high default rate that they, the taxpayer, must annually cover, and that over 44 million US citizens are starting their careers in substantial debt.

It might also be important at this point to note that if in fact the subsidized college education is creating an artificial demand, then the natural economic outcome is an increase in price.  This of course is presuming that an increase in supply does not happen.  I think a review of the current closures of colleges and the wave of mergers would suggest that supply of college education opportunity is decreasing.  It is not surprising that the cost of college is on the rise. 

Even more painful is that there are a couple of solutions that can address rise in the costs of a college.  In the next two posts I will discuss two major cost areas that if properly managed could slow this rate of increase.  These solutions may even hold the possibility of lowering college costs.