Tuesday, June 3, 2008

Are selective student loans better than federal guarantees?

A lot of student loan companies are getting out of the business - the federal subsidies and risk insurance simply aren't worth the risk in certain types of colleges. As the lenders move to private loans, they are raising interest rates and they are evaluating student borrowers on an individual basis. While the student and student's family credit rating will play a role, some lenders are also looking at graduation and employment rates of their colleges. Before long, student lenders are likely to consider employment outlooks and average starting salaries of the various majors and professions...

While Congress scrambles to figure out new ways to pump money and profitability into the student debt business, maybe they should be instead asking if this program serves a total net benefit to society. Guaranteed subsidized loans create a lot of demand for college enrollment - including students who aren't necessarily prepared for college and some students who are spending more than they otherwise would have been willing to spend. Instead of trying to save costs, many students are borrowing enough to feel completely unconcerned with later financial concerns they'll have to face.

There's an issue of rapid tuition inflation - some of this is from the general monetary inflation of the current American economy, and some of it is from this over-purchasing of higher education.
The current cost of maintaining the status quo is actually more tuition inflation, more government spending, and more debt for graduating college students and less money for them in the long run.

Currently, federally subsidized student loans are only based on income and parental income. If we shifted to a merit-based and need-based loan system, a lot of the risk inherent to the system would evaporate and we'd still be helping our most needing and talented students with money for college.

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