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The Basics Of The Student Loan Mess

May 27, 2008
These past weeks there has been talk in the higher education press about private lenders and state guarantee agencies either withdrawing from the government-subsidized student loan market or refusing to underwrite new loans. These financial institutions cite either a cash crunch or a credit crunch, or reductions in the federal interest subsidy as the reasons for pulling back on such loans.

These are all legitimate reasons for the private financial markets to back out. Student loans were never meant to be a profit center when they were first proposed by the federal government under President Eisenhower. The purposes of student loans are to make college affordable and accessible to anyone who is admitted to college and to help them establish good credit early in the working lives.

When I applied for my first student loan 30 years ago, I could borrow up to $2,500 and I didn't need to pay an origination fee. Today, the maximum a college freshman can borrow under the subsidized loan program is $3,500; considering inflation it's a lot less than I could have borrow 30 years ago and covers a much smaller share of the costs! The $2,500 I could borrow in 1978 would have covered more than half the cost of my freshman year at Rutgers. The $3,500 I could borrow today would cover less than a fifth of the freight--assuming I received the full amount after going through a means test!

The federal unsubsidized interest (unsubsidized meaning the borrower or their families pay the interest while the borrower is in school) loans were a creation of the Reagan Administration. They were initially a means of providing loans for graduate and professional school students who could not qualify for the maximum amounts for subsidized interest loans.

During the go-go Eighties, a graduate or professional student could borrow up to $5,000 a year from the subsidized interest loan program -- but had to prove financial independence or go through a means test along with their parents. Then they had to turn to the unsubsidized loans -- popularly known as PLUS loans to make up the difference. Back in those days, the subsidized loan and the unsubsidized loan together with some employment could pay almost the full freight.

That's not the case today.

It's easy to blame the colleges; their administrations make the tuition decisions, not the federal government. But they are just like other businesses that must deal with escalating health care costs (tenured college faculty are more senior level workforce than most government agencies and private corporations); fuel prices (larger schools own and operate as much housing as some medium and large-sized cities) and pensions.

There will need to be a major redesign of the student loan programs in the next presidential administration not only to reconsider outdated borrowing limits, but also the means tests and multiple government loan programs with their own set of regulations and bureaucracies. In an ideal society, students should not end their higher education owing more than their first year's salary in their chosen field.

That's a lofty ideal, but one worth reaching for.
About the Author
Contact Stuart Nachbar at Educated Quest, a blog on education politics, policy and technology or read about his first book, The Sex Ed Chronicle, a novel on education and politics in 1980 New Jersey, at Sex Ed Chronicles.
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