Student Loans Are Dying a Long, Slow, Undeserved Death

Photographer: Scott Eells/Bloomberg

Both liberals and conservatives gripe about student debt, and government-backed loans are the casualty.

Update, Aug. 1: Congress voted yesterday to tie student loan interest to market rates. So for now rates on subsidized loans will go up about half a percentage point, instead of doubling to 6.8 percent. That helps some students, but it doesn’t change the basic fact that government-backed loans pay for an increasingly smaller share of a college education.


Few federal programs are as uniformly unloved as student loans. Since the government replaced federal guarantees with direct lending, conservatives have ramped up criticism of the loan program as an unnecessary public intrusion on banking. Meanwhile, liberals dislike that federal student lending is an entitlement program that benefits mainly the middle class.
What can there be to love about a program that starts new graduates on their adult life with piles of debt? How about this: as college tuition rises, loans are still the most cost-effective way for the government to bridge the gap between the cost of college and what students and their parents can pay. Yes, there are abuses: some for-profit institutions milk loan programs to fund useless degrees. For the most part, the basic premise of having students pay for their education with their future (and higher) earnings works.  For many years, the loan program was the centerpiece of federal education aid, providing enough money to pay for an education at a four year state school.

Now that program is effectively being dismantled. Earlier this month the rate on most new undergraduate loans doubled from 3.4% to 6.8% as Congress went off on vacation. Now there may — or may not, given the state of House-Senate gridlock — be an agreement to reverse the increase and tie future rates to the interest on Treasury bills.

But the cost of the rate increase ($2,600 for the typical graduate, as much as $4,500 for some) isn’t the biggest issue here. What matters more is that the undergraduate loan program has become the abandoned stepchild of education aid. What we’re seeing now is the latest step in a slow withering of government-backed student loans as a viable way to pay for a college education.

Consider this: In 1987, the limits on subsidized loans were $2,625 a year for freshmen and $4,000 for seniors . Now they’ve gone up to all of $3,500 and $5,500. In 2012, the federal government added the option of another $2,000 in unsubsidized loans, similar to those offered for graduate and professional schools, with less attractive terms (the interest rate on those loans was already at 6.8 percent).

In the same period, tuition at private colleges has doubled; at public four-year colleges, it has tripled. Below, using tuition figures from the College Board, I’ve charted the four-year tuition of a public college versus the total subsidized loan limits a student could get for those years.* You can see that 25 years ago those loans would have easily covered in-state tuition. That would even have been the case in 2002. Now loan aid doesn’t come close to the cost of college. If you go out of state or to a private school, the numbers look much worse.

The irony of some of the recent complaints about student loans is that many of the worst stories don’t come from students who owe too much in federally guaranteed debt, but from those who couldn’t borrow enough from federal programs and were pushed into higher-cost private loans;’s Phil Villarreal provides a good example here.  The federal loans are a lot better than the alternatives, including the parents’ retirement accounts and credit cards.

They’re also an excellent deal for the government. Because of the way the U.S. reports student loan costs, it’s hard to disentagle the whole set of undergrad, and professional school programs. Overall, graduate and undergraduate loans together make the government a substantial profit. Over the next few years, that profit is likely to decrease as the government’s borrowing costs increase from today’s historic lows. Even so, each dollar of tuition paid through federal loans will end up costing the government less than 10 cents (look at the figures for 2018-23 here) even for the most generous undergraduate student loan program.

Keeping rates at 3.4 percent would add $4 billion a year to the cost, bringing it to a little above 20 cents for each dollar of subsidized loans. In terms of the cost per dollar of tuition that gets covered, the student loan program is hard to beat. Think of it this way: the average cost of tuition, room and board at an in-state school in now $17,860 a year. We can lend a student that money, at a cost that’s ultimately less than $3,600 over the life of the loan. Or the government can provide $17,860 in grants … except it can’t because the money’s just not there. Currently, the annual maximum for Pell Grants, the low-income grant program is $5,550.

Critics of the program on both left and right seem to find this efficiency galling. The hot subject in discussions of student loans now is “fair value accounting,” a way of valuing the cost of student loans that is supposed to take into account the risks the government bears. Both the conservative Heritage Foundation and the liberal-leaning New America think tank have come down in support of this kind of accounting. By the calculations of influential New America fellow Jason Delisle,  fair value math would turn $96 billion of federal profits on student loans over a decade into $184 billion of costs.

Fair value certainly sounds like the right way to do things — who would choose unfair value? But it’s given some folks the mistaken idea that the government’s current calculations don’t count the borrowers who default. Actually, they do. What’s really at stake in the fair value debate is, as Delisle told me,is  ensuring that taxpayers are “adequately compensated” for the risks they take. Adequate compensation is basically another way of saying the profit that private lenders would demand. Delisle thinks it’s reasonable for taxpayers to get that.

“It’s our money — it just passes through the government,” he says.

Few would really think of those missed profits as as a “cost.” Nonetheless, the fair-value train has more or less left the station, adding one more entry in the long list of complaints about the student loan program. Conservatives have hated the program since direct government lending cut out private banks. The 2012 Republican platform called for eliminating it. Meanwhile, liberals aren’t eager to defend it. Much of the program’s aid goes to those firmly in the middle class — and even the middle class’s upper reaches  Many students going to private schools whose families have incomes around $100,000 can get federal loans. With a sibling in college, even students with family incomes over $200,000 could be eligible.

Delisle for one would much rather that any money that goes to student loans, subsidized or unsubsidized, be spent on Pell Grants, the government’s lower-income grant program. One problem with this is that trying to limit tuition aid to the poor ultimately cuts the constituency for aid and makes less aid available for all, as Josh Freedman (another New America fellow) cogently argues in the Atlantic.

And keep in mind that it’s not only the poor who have trouble paying for college. Plenty of folks well above the poverty line — but still not close to thinking of themselves as rich — wonder how they’ll come up with tuition. Some who oppose student loans think that cutting the flow of government aid will ultimately force college costs to fall. Unfortunately, making less college aid available to the middle class is (remember that chart above) effectively what we’ve been doing for two decades. And it doesn’t seem to have made anyone happier.

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*NOTE: Most of the College Board’s historical tuition numbers are updated to account for inflation. Wonkily, I’ve gone back through the archives to find actual college tuitions for prior years to allow an apple-to-apples comparison with student loan limits. Also, for simplicity’s sake, I’ve used tuition figures for the year a student started college for all four years, so the chart slightly understates the costs.

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