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Sunday, December 11, 2016

Should We Stop Referring To Student Loans As ‘Financial Aid’?

Students who take out loans aren’t receiving special favors. They’re making financial transactions like any other.

Do we make both a conceptual and analytical mistake when we refer to student loans as a form of “financial aid”? Should that term be something to be resisted? Demos’ Tamara Draut brought up this point in a conversation recently, and I think it needs to be explored further, because it frames how we speak about student loans.

The government records and documents student loans as a form of aid. Here’s a list of the “amount of financial aid awarded to full-time, full-year undergraduates, by type and source of aid,” and loans are listed right next to grants. When pundits say that “student aid” has exploded over the past decade, and argue that aid is driving increases in tuition, it disguises that the aid that has exploded is a signficant amount of debt for young people.

I’ve taken out loans and received gifts. When I’ve signed up for, say, a car loan, I never went “oh you shouldn’t have” afterwards, like when I’ve received a really nice birthday gift. I understood that the creditor wanted to lend me a certain amount of money at a certain rate, and I wanted to borrow it. Full stop. Unless the interest rate charged is purposely manipulated for some reason [1], there’s no reason to think of this as aid at all.

Student loans are an economic transaction, the same as if the government contracted out to build a bridge, or hired a person to serve in the military or police force or be a teacher. The money spent here isn’t “aid.” Hiring someone to build a bridge exchanges labor for cash. Student loans exchange cash now for cash later plus interest. Those student loans would be underprovided without the government, certainly, but in the same way that bridges and law enforcement and other goods would also be underprovided if they weren’t done by government.

I think this clarifies some of the issues and responses I’m seeing in the discussion about whether or not higher education is driven by increases in so-called “aid.” Megan McArdle wrote in Newsweek, “In a normal market, prices would be constrained by the disposable income available to pay them. But we’ve bypassed those constraints by making subsidized student loans widely available.” Let’s leave aside the issue that the vision of education constrained by disposable income is Mitt Romney’s vision that students should get “‘as much education as they can afford.” There’s a bigger issue.

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