Student Loans and the High Cost of College

What is your opinion of government student loan programs? Aren’t they helpful to students who can’t afford the high costs of college?

According to the National Center for Policy Analysis, the federal government has been guaranteeing bank loans for college tuition since 1965. The default rate on those student loans is more than 15 percent, three and one-half times the rate of default on mortgages and nine times the rate of default on auto loans. In fiscal year 1994 alone, defaulted student loans cost American taxpayers $2.7 billion.

One of the effects of these billions in federal loans and grants for college aid has been to boost the price (tuition) of college, in much the same way that billions in federal expenditures for Medicaid and Medicare have boosted the costs of medical care. In that sense, by artificially boosting the demand and cost of college, the federal government's policy has actually worked against one of its intended purposes--to enable more of the poor to go to college.

There is at least one other way in which federal involvement has worked against the poor. To the extent that most Americans are aware of federal programs for college aid, they support private efforts less. In other words, government aid "crowds out" private aid. It also diverts scarce capital from otherwise going to where it would be more highly valued (as evidenced by the fact that government must subsidize the interest cost on student loans to get capital to go there). This crowding-out effect has been observed with many federal initiatives. For example, people take less care of their elderly parents these days because they assume the government will handle it.

In a free market, capital for student loans would have to compete with other uses to which capital can be put. A prospective college student would undoubtedly have to sign a contract to pay a student loan back at a competitive, market rate that also reflected the chances of default. If a student was not willing to pay a market rate to get someone (a bank, let's say) to lend him money for college, he might well seek assistance from friends, family, future employers, private college aid funds that would spring up to fill the gap, etc. Or, he might simply not get the loan.

In the case of a student not being able to afford a market-rate loan in a free market, some would say that outcome is harsh and uncaring. But that involves a dangerous value judgment. Since capital is scarce and valuable, it will be used in other ways, perhaps for someone to afford an automobile or to pay a doctor bill or to build a home. If someone wants to say categorically that using those funds for a student loan is better use of the money, I'm not sure how they would justify that other than through some emotional attachment to the "cause" of college loans.

Finally, those of us who believe in freedom and free markets recognize that there are a great many worthy causes out there, including sending worthy students to college. Many of us would do more ourselves to assist, if it weren't for the fact that after government at all levels takes its 41% of what we earn, there isn't much left to give. Nonetheless, we are working for a revival of a truly civil society, in which people accept responsibility for their own goals in life and, to the extent they can, give time and resources to help others less fortunate so they can reach their goals too. It just isn't true that the only people with compassion or the foresight to see the value of education are politicians spending other people's money. Have faith that a free and responsible people will take care of worthy things; there is little reason to believe that politicians and their bureaucracies care more, or solve problems better.

Let me suggest a couple other sources of information that may be helpful to you:

1. Citizens for a Sound Economy, 1250 H Street, NW, Washington, D.C. 20005. Phone: (202) 783-3870. Ask for their "Issues and Answers No. 14," entitled, "Direct Student Loans: Putting Taxpayers at Risk."

2. Cato Institute, Washington, D.C. Phone: (202) 842-0200. Check out their web page at for possible information on this topic. I have reason to believe they have produced material on student loans because one of their scholars, Stephen Moore, authored an article in the April 10, 1996 Washington Times entitled, "Student Loan Boondoggle?"

3. National Center for Policy Analysis, Dallas, Texas. Check out its web page at