The Federal Student Loan System Isn't Worth It for Students or Taxpayers

Neetu Arnold

Editor's Note: This article was originally published by Newsweek on June 7, 2021 and is crossposted here with permission.


President Joe Biden's administration still hasn't decided whether it should forgive student loan debt. Despite Biden's pledges on the campaign trail, the reported exclusion of debt forgiveness in the upcoming White House budget proposal means the proposition will likely not happen anytime soon. Biden himself seems reluctant to forgive student loans broadly, breaking with progressives like Sen. Elizabeth Warren (D-Mass.) who fervently advocate for large-scale loan forgiveness. Meanwhile, conservative politicians have produced several alternative bills focused on efficiency and transparency in the federal student aid system.

But no simple policy of debt forgiveness will stop the same problems from happening again. It will only encourage more students to make poor decisions about taking on debt. Even improvements in the efficiency and transparency of the federal student loan system won't fix all or even most of the problems it has caused for American higher education, American taxpayers and students themselves.

Policymakers must confront the stark reality that the federal student loan system is hopelessly broken. American students would be better off without it.

The federal student loan system has failed financially. A report from a JP Morgan consultant found that taxpayers are already likely to be on the hook for around one-third of the federal student loan portfolio—that's around $500 billion. According to the report, the federal government expects to receive 96 cents for every dollar defaulted on a student loan, and therefore claims that the system is profitable. It justifies this ludicrous assumption by giving defaulted borrowers new loans, which allows the program to say that the previous loans were paid off.

These shady accounting practices might benefit federal bureaucrats who get a salary pushing loans. But American taxpayers have to foot the bill. The JP Morgan executive's report estimates that the government can realistically expect to recover only 51 to 63 percent from defaulted student loans. The rest will accrue to the already colossal federal debt.

While it is bad enough that the government falsely presents its costly student loan system as profitable for taxpayers, the system isn't even profitable for many students. Forty percent of college students drop out prior to completing their degrees. A majority of college dropouts owe student debt, and 84 percent of dropouts' loan balance is left unpaid after 12 years. The harmful financial consequences of the student loan system, combined with the push to send every student to college, can be life-altering for these individuals.

One of the worst effects of the federal student loan system has been an artificial increase in the demand for higher education, which has caused exorbitant tuition increases. Since 1980, tuition at American universities has more than doubled, affecting both those who borrow and those who don't. Much of this tuition rise can be traced back to the massive enrollment growths resulting from the federal student aid system. In the name of accessibility, student loan pushers have made college financially inaccessible to almost everyone besides the upper class.

This academic rent-seeking not only inflicts a massive financial strain on the economy but also leads colleges to spend profligately on administrative bureaucracies and luxurious student services. In my recently published report Priced Out: What College Costs America, I documented the growth in high-salaried administrators who focus on educationally peripheral activities such as global outreach, "diversity and inclusion" strategies and "wellness." Businesses that have to make a profit have some natural restraint on bureaucratic growth; not-for-profit colleges have none. University administrations just get more bloated, and the academic portion of the American university becomes increasingly sidelined. All that tuition pays for lower education quality.

Meanwhile, the return on investment of a college education is dismal. At least 40 percent of recent American college graduates are underemployed; in other words, they are working in jobs that a high school graduate could do. The college earnings premium has stagnated for the past decade or so, and the college wealth premium—perhaps a better measure of college efficiency—has outright declined.

Yet some still argue that more federal loans and more college enrollments will fix these problems. They call for greater accessibility to "the promise of higher education" for low-income students and minorities, even while these students disproportionately drop out of college and struggle for years with student debt. And for those who don't go to college, the increasing credentialism caused by our diploma-saturated economy has reduced employment opportunities.

We need to focus on access to employment opportunities over access to higher education. Today, guidance counselors and parents alike encourage young students to attend college. But college isn't for everyone. Students should be encouraged to pursue alternative post-secondary education paths, such as trade schools or apprenticeships. That way, they can save time, money and energy that would have otherwise gone to a higher education they didn't need.

If we eliminate the federal student loan system, we can begin to reimagine the future of higher education. The next generation of high school graduates could have multiple paths to financial and social prosperity, instead of being stuck on the one-way road of academic credentialism. Bereft of its rent-seeking opportunities through student loans, higher education would be forced to return to its core purpose of providing excellent education to academically inclined young Americans. And taxpayers would no longer have to worry about more of their income being taken to pay for the government's poor financial decisions. This brighter future for higher education could be ours if only we have the courage to end the federal student loan system.


Neetu Arnold is senior research associate at the National Association of Scholars and the author of Priced Out: What College Costs America. Follow her on Twitter @neetu_arnold.

Image: Karolina Grabowska, Public Domain

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