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Sunday, September 25, 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.

  • CPANY

    I believe that all education in America should be free to citizens, but that college education should be available only to those intellectually qualified.

    • SaneJane

      Isn’t that what entrance exams are for? If a person can absorb information and get a passing grade they can benefit. College education can mean a lot of different things but you support a system limiting it to those who have prior advantages.

      • CPANY

        What “prior advantages”? Brains? Intelligence? The student’s ability to stay in college, with all costs paid by the government including living expense stipends, will depend on his or her high grades on the entrance examination and his or her ability to maintain high grades while in college. That will ensure that our educational dollars are being well spent on the superior students who show dedication and intelligence.

        Implicit in this is that college curricula will be rigorous, so that only the best will graduate.

        The less intellectually qualified won’t be precluded from college, but they won’t receive the government assistance. They’ll have to pay for their educations.

  • Student loans are definitely not the same as financial aid, which could be construed as a grant or gift to help a bright student without the financial means to pay college tuition get the education that he/she needs to succeed in the 21st century. Student loans, regardless of how much time a student has to repay it and how low its interest rate may be, discourages higher education inasmuch as many students refuse to be burdened with debt when they don’t even know if they are going to find a job when they graduate or make payments while they are struggling to make ends meet on salaries that are often barely above the minimum wage.
    This is far from being a trivial matter. The reason so many job vacancies remain unfilled in the USA, or are filled by foreign professionals, is because other industrialized nations are providing free education to bright students, with special emphasis on hard science. BTW, the problem is not our schools or universities, all we have to do is look at the number of foreign students attending our universities to realize that our institutions of learning are second to none. Unfortunately, those that see socialism behind every attempt to lift the middle class out of the rot we are in and narrow the financial gap between the very wealthy and the middle class, will continue to do everything they can to maintain the status quo. The obstacles that prevent or discourage many bright young Americans from pursuing a college education is probably the single most important issue in the USA today, because of its long term impact, and very few people pay any attention to it.

  • johninPCFL

    Excellent discussion up to the point where: “If actual demand overwhelms the supply of the system, that’s a problem of supply, not demand. And the obvious solution is to increase the supply. ” In the real world, when supply fails to keep up with demand, prices increase. This upward rise in prices by the offerers is stopped only when further increases in price shed more accepters because the cost is deemed (by the accepters) too high and total dollar volume (or profitability) for the offerers falls.

    Another issue wrapped up in the discussion is that the supply of higher education is not infinite, nor can it be. Therefore, when more money becomes available to the accepters (whether through gifts or loans), the price from the offerers can increase because increasing the price does not reduce the dollar volume. This leads to another, higher price point where the accepters ultimately again decide that the cost is too high. The lower the loan’s interest rate, the higher the point to which the new price may rise.

  • howa4x

    In most other industrialized countries higher Educationis either free or minimal cost. Only here where everyting including health care is a for profit system where some groups make billions off the transaction. How are we going to compete and grow the ecomony if we sadle a whole generation with this debt? How are they going to buy all the cars and houses we need them to buy to keep our economy moving if they are in deep debt prior to starting out? Is it a wonder then the trend now is for these young people to come home to live with their parents because they can’t afford rent. That means as each sucessive generation gets in debt they will contribute leass and less to our economy. Another issue is why would I go 50K in debt for a job that only pays 25,000/yr. Why even go to college? We as a society need these people to go out and create new industries and have new ideas. It dosen’t say much for college when some of the wealthiest didn’t even finish or go at all. Bill Gates left as a freshman, and Steve Jobs never finished.
    The Reality is if we want to be competitive in the future we need to make higher ed free or minimal in cost. We have to stop this nonsense that only the banks can make a lot and look out for the good of the country. This is the only loan you can’t go bankrupt on, thanks to the republicans and the banks. If we are financially killing off the future how are we going to survive?