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The Student Loan Scam


Full disclosure: I am currently paying federal student loans that I obtained while in college. I never finished college and it was never a huge amount (about $6000), nor do I expect any kind of reform to ever benefit me, but it would be unfair to say I’m a completely disinterested party.

That said, student loans are big business in the United States. The federal government makes over $40 billion in profits on student loans annually, to say nothing of what private firms make. There is currently more than $1.2 trillion in outstanding student loan debt. To put that in perspective, the total amount of all credit card debt in the US is about $900 billion. It’s not a small amount of money.

The total amount isn’t what makes it a problem, though. That’s just to provide a sense of scale. The issues with student loans are manifold:

  1. They are generally taken out by people in their late teens and early 20s who have little or no conception of the significance of taking out large loans, and likely poor comprehension of the potential long-term consequences of these debts. While students entering college receive financial counseling about the responsibilities and consequences of student loans, it is rare that anyone is discouraged from, for instance, taking out $200,000 in loans for a career likely to top out at $60K.
  2. Once you have student loan debts, [they are nearly impossible to get rid of.]( In most cases, federal student loans can only be discharged (canceled/forgiven) if you die or become permanently disabled. They are very rarely discharged in bankruptcy, and may be canceled in some other limited circumstances (such as your school closing before you've completed your program.) Generally speaking, once you've taken out the loans, you're stuck with them until they're paid or you die.
  3. [Current interest rates are high.]( In an age where many people can get car loans with 0% interest, federal student loan rates range from 4.29-6.84%. The rates on private loans can go even higher. The standard justification for these rates is that handing out loans to people with no credit history (which describes most college students) is risky. But the risk is actually very, very low, because these loans are so difficult to walk away from.
  4. [As tuition rates skyrocket, job prospects for graduates diminish.]( College is more expensive than ever, yet rates of graduate unemployment and underemployment remain high. Even worse, [what you make in your first job influences what you'll be paid your entire career.]( If you graduated from college at the bottom of the recession, you may have had to take a low-paying job just to survive--that salary is likely to haunt you for the rest of your career.
  5. The sheer amounts of money involved have also pushed students and faculty toward a customer/business relationship model. The student-as-customer mentality [warps expectations and outcomes on both sides](, while providing little benefit to students and academia more generally.

There are other factors involved, too. Private, for-profit colleges are driving up tuition costs and providing questionable educational value. With the government acting essentially as a lender from which borrowers can never escape, some colleges have taken advantage of the situation to hoover up as much taxpayer money as possible, knowing they ultimately aren’t on the hook for providing a good value for money.

Yet another way to think of this situation is as a preemptive wealth transfer from millennials to Baby Boomers. After all, most of the loans being held presently are owed by millennials, and the profits from those will go toward funding programs to benefit current and future seniors–that is, Baby Boomers. Essentially, young people are borrowing against their (hopefully) future earnings, and people who’ve already done pretty well for themselves–and who didn’t have to go into enormous debt to get an education–enjoy the benefits.

As usual, though, I have an answer, and it shouldn’t be surprising: free tuition for public colleges and universities. When this is brought up, it is often shot down as too expensive, but it isn’t. It would cost about $70 billion a year, but likely less, and possibly as low as $40 billion, depending on how the funding is structured and handed out to state schools. For comparison, $40 billion is about what it costs to run the Department of Energy each year. The Defense Department and programs like Medicare and Medicaid easily cost an order of magnitude more. Put up against those slices of government, the cost of free tuition barely even rates. It also removes any government incentive to treat student as cash cows, and with the money going into public institutions rather than inefficient and poorly run for-profit schools, decades’ worth of disinvestment from higher education may start to be reversed. (I would also support the money going into non-profit private institutions, depending on circumstances.)

Dozens of countries provide free college educations to their citizens. It’s a good investment, but it requires not treating students solely as a profit center, and regarding education as something more important than a stepping stone to a job. It’s a mindset that has fallen out of favor in the US, but one I hope we can soon return to.

As it has become an election issue with Bernie Sanders’ call for free public tuition, it’s a topic we may yet hear a lot more about.