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Students arrive for the 2024 Undergraduate Commencement Ceremony at Loyola Marymount University on May 4, 2024 in Los Angeles, California.
Editor's note: Beth Akers is a senior fellow at the American Enterprise Institute (AEI), focusing on the economics of higher education. Preston Cooper is a senior research fellow at the Foundation for Research on Equal Opportunity (FREOPP), researching higher education. Joe Pitts is his AEI research assistant, focusing on higher education policy. They are co-authors of a new report published by AEI and his FREOPP, “How Private Student Loans Can Fix Higher Education.” The opinions expressed in this commentary are their own. Read more opinion pieces on CNN.
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The Biden administration recently announced its most ambitious effort yet for student loan forgiveness. Combined with a series of initiatives already underway by the administration, the new plan promises to reduce or eliminate student loans for more than 30 million borrowers. Unfortunately, debt cancellation campaigns fail to address the fundamental problems with student loans. And such mass forgiveness efforts will only accelerate the dismantling of the federal student loan program.
Aaron Cramage Photo/American Enterprise Institute
Beth Acres
President Joe Biden and his Republican critics agree the loan program is broken. Democrats argue that the program is burying students in unmanageable debt, and Republicans argue that the program's status as a loan program rather than an entitlement program is in jeopardy due to Biden's mass forgiveness efforts. I believe I have been exposed.
preston cooper
preston cooper
But while the current administration has done little to improve the future of student loans, pushing ahead with mass loan cancellations, many conservatives believe it's time for the government to get out of the student loan business altogether. It is claimed that
Privatizing federal student loans, allowing the government to withdraw them and allow the private sector to finance them instead, is an idea worth seriously considering. Millions of students are pursuing college degrees but are not economically advantaged. Students can do this because the federal government is willing to funnel money to them with little regard to program quality or expected revenue.
Duane R. Mercier
Joe Pitts
Higher education institutions have little incentive to improve their return on investment and every reason to prop up programs of questionable value and to obtain more federal funding by creating new programs and increasing tuition.
A greater role for the private sector could solve this problem. When a lender uses its own money to make a loan, it enjoys rewards when the student repays the loan, but must bear the costs if the student defaults. They have skin in the game. This means that if you take out a loan that is not partially or fully repaid, you lose money.
To persuade private lenders to let students repay their loans, universities need to keep their prices competitive and pay more attention to students' graduate school economic outcomes, both of which need to be addressed from the student's perspective. It will be a profit from. Therefore, privatization creates incentives for universities to induce students to obtain degrees that are well worth the money spent. This should be welcome news in today's higher education environment, where more than a quarter of bachelor's degree graduates leave students worse off financially than they were when they entered.
The federal government is scheduled to lend out $1 trillion in new student loans over the next 10 years, and the Congressional Budget Office projects that the government will lose about 25 cents on every dollar loaned over the next 10 years. Therefore, privatizing student loans could save taxpayers at least a quarter of a trillion dollars over 10 years.
In reality, the savings would be even greater because suspending federal loans would essentially eliminate the ability of future administrations to buy votes by promising to cancel loans. Lawmakers could use those savings to reduce the deficit or expand financial aid to students in real need.
But lawmakers who want to push for privatization must avoid several traps. Any form of federal guarantee for private student loans should be avoided because it transfers the risk of default from the lender to the taxpayer. For example, if the federal government guarantees a private loan, a return to the Federal Family Education Loan (FFEL) program should be prevented. Such an arrangement allows the lender to reap all the profits but not bear any of the consequences of creating a bad debt. This removes much of an incentive for lenders to ensure that loan funds flow only to high-quality education.
Reducing federal lending alone will not be enough to create a thriving private student loan market. Leaning on financial innovation, hostile regulators often threaten to prevent the private sector from making lending decisions using factors that correlate to each university's financial value, such as expected earnings or a program's return on investment. However, they are forced to rely on less relevant but long-established policies. Metrics such as FICO score.
The Consumer Financial Protection Bureau even argues that using college default rates may violate the Fair Lending Act. Without legal protections for lenders who make decisions based on university performance, overzealous regulators could stifle the private market.
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Finally, proponents of privatization should not ignore accessibility issues that may arise from the termination of federal loans. Approximately half of students attending four-year universities rely on federal loans to pay for their education, many of whom are unable to afford it. While some may undoubtedly be able to secure private loans instead, others will remain without access to sufficient credit. But rather than haphazardly expanding access by providing colleges with complex backdoor subsidies from federal loans that are never fully repaid, Congress has decided to transfer some of the privatization savings to low-income Consideration should be given to increasing the amount of Pell Grants, a student assistance program for students. student. Unlike loans, Pell grants do not have to be repaid, helping to cover the cost of college and reducing a student's need for debt.
America's universities remain the envy of the world, but a dysfunctional federal student loan program has broken the promise of higher education for too many students. While helping students access higher education is a laudable goal, policymakers should consider that over 60 years of the federal government's approach to student lending has done more harm than good. be. Privatization, along with other smart reforms, will help ensure that students have an advantage when it comes to getting into university.
