Interesting when you look back from 2008. UK student loans now at �21.8 billion:

http://www.thinkmoney.com/loan-news/1145/student-loans.asp

S Jones, at 10:10 am EDT on July 18, 2008

Student Loans

Has anyone started to make the connection between student loans and higher tuition costs? I don’t mean the usual connection: as costs go up, loans go up. I mean the other way: as loan availability goes up, tuition costs go up. Simple supply and demand. As demand goes up (the amount of money available to pay for college), the price should go up. If all of a sudden I could get a subsidized loan for a car, I might consider getting one whereas now it just doesn’t make sense because I cannot afford it.

filip, Loans and tuition costs at UPenn, at 8:46 am EST on November 17, 2005

A Solution to The Debt Bomb: Optimizing Financial Aid

The student loan conundrum is a classic case of an economic breakdown compounded by decisions made for political reasons.

The major problem is that the choices students make—fueled by loans—are completely divorced from price signals; therefore, irrational choices result.

With the minor exception of some lab fees in a few courses, universities used fixed price schedules and also fixed credit awards that are based on butts-in-seats time, thereby communicating to students that a three semester hour course on The Canterbury Tales is the exact equivalent of a three semester class in algebra (both in cost and credit).

That’s problem 1.

Problem 2 is that the loan source is politically controlled and responds only to political pressures rather than taking economic factors into account as well. The government awards loans to all comers on an equal basis, regardless of the economic prospects that result. That is, whether you plan to major in computer programming or geographic information systems, or to become an expert in the great vowel shift in Middle English, you qualify for the same loans and can wind up absorbing the same total debt load. It’s as if the credit union would lend you the same amount of money whether you planned to buy a house (an appreciating asset) or to donate it to your church (nice for the church, but really tough to pay back if you actually needed the loan in the first place).

A great change would need to happen if anyone were actually interested in addressing this problem seriously (which I greatly doubt — as long as the loans flow, universities will gladly admit the students and take their money, while tut-tutting about the burden that the _government_ is making them bear).

What would need to occur is that we reorganize all financial aid to make schools accountable for results and then to rethink the grants and loans issue to allow each form of aid to do what it does best.

So — and again, I recognize that this is merely delusional babbling given that everyone who benefits from the status quo would have to give up many of those benefits to adopt these ideas — here’s what should happen:

1) The feds should award a total pool of student aid money equally to each school based on their admit pool size. That is, a school with an undergraduate population of 10,000 gets a pool of aid dollars that is one-quarter the size of the school with an undergrad population of 40,000. State aid to public schools would go into the same pot.

2) The school is responsible for repaying the loans to the feds and to the state if specified by that state. That is, students are not indebted to the government — students are instead indebted to the school, and are responsible for repaying the schools.

Thus, schools would suddenly have an incentive to produce graduates who are well-prepared to pay back their loans with their undergrad degrees or, should they proceed to grad school, to become employable after grad school.

3) The schools get to allocate their pot of financial aid money across departments. Rather than students deciding, in effect, which departments will get the benefits of all that financial aid, the schools will be able to target those programs that are most in need of support.

The departments will assign an aid multiple to each course offered (such as 1/10, 1/2, 3/4, etc.) That multiple will be applied to the basic, flat-rate tuition price and the result will be that, for students who qualify for financial aid, the out-of-pocket cost of the course is reduced by that fraction.

In effect, this means lowering the cost of taking some classes and raising the costs of others and letting students give themselves a per-course financial aid award that is informed by the judgment of the school as to how valuable the course is in terms of preparing the students to repay the aid. The school collects the reduced tuition for each course and keeps track of the accumulated financial aid award that each student has obtained through course selection and handles repayment for each student. Thus, the school has every incentive to help students make good choices and good use of the classes, and to help them succeed.

4) Schools would be able to divvy up the money into grants and loans any way they wish — so when a school wanted to support programs and courses that don’t improve anyone’s prospects for repaying loans, that school would reduce the tuition off the flat rate amount through grants — meaning that students qualified for financial aid would take the course at the reduced price, without any increase in the amount they have to repay.

This whole plan would force universities to level with students and communicate to the whole world what the university already knows about the classes — that is, which ones lead to employment and higher career earnings, and which ones lead to pulling coffee at Starbucks. Students would still be free to take the latter courses, but they would have to fit them in according to their financial need and the intensity of their desire.

This whole system would have the net result of perfectly tailoring the repayment load to the prospects for successfully repaying it, while addressing equity concerns (because there would be no arbitrary cap on how much debt students could assume ... each student, working with the school, would come up with a course plan that meets the student’s academic goals at the optimum total price (out-of-pocket tuition paid on registration plus loans/grants awarded through per-class tuition reductions).

And acadmic scholarships could be handled the same way — that is, instead of giving a dollar amount, schools could offer a percentage “kicker” to each scholarship student. That is, instead of expressing a free ride in dollars, that student would get a 1.0 financial aid award (meaning their tuition reduction multiple is 100%). But another student’s scholarship might be.50 — meaning that student gets half off of whatever they would pay otherwise (i.e., it could be half off the full flat-rate if the student doesn’t qualify for need-based financial aid, or it could be half-off the lower price if the student qualifies for need-based financial aid).

Needless to say, this all would work even better in graduate and professional schools (as we already see, given that people line up to lend to future doctors and lawyers).

JMG, at 10:19 am EST on November 17, 2005

At the time I graduated from college in the last century, my father made $23,000 per year, so I had no substantial help from my family to attend college. When I graduated my student loan balance was $10,000 and my first year’s salary was $16,500.

I had no problem paying the monthly payment to retire the debt. If a student has twice the level of debt and makes twice the level of money, it sounds like it should not be a problem. Since interest rates are lower now than they were then, the monthly payment will be less than double the amount I paid.

I had a car payment of $170 per month then, and I think a recent graduate can purchase a modest vehicle today for $340 or less (double my payment). I also paid $185 per month as my half of the rent on a small apartment. If you double that to $370, then finding a small apartment with a roommate for $740 today might actually work. Federal taxes are at a much lower rate than they were then today, so there should actually be some economy of scale realized here.

Investors get rewarded for their risks. As was pointed out in a previous comment, a $20,000 loan balance to earn $1 million more over a lifetime is a pretty good return on an investment. I would prefer to see that nobody has to take on debt to attend college, but that is not likely to happen. I just don’t see that it is a bad thing to have students take on debt to pay for their education.

Randy Freebourn, at 3:22 pm EST on November 17, 2005

Point

I will admit that I perhaps overemphasize the particular part (janitor) as opposed to all the less-than-skilled labor on campus. I would include diningroom workers, bookstore workers, etc. being collectively the subject of criticism. But this really goes to the heart of some of the problems in higher eductation’s finacial situation — unnecessary expenditures for no reason other than “charity,” “fairness,” or “social justice.”

The sums may not be on the scale of some waste, but they are significant. Even small cost cuts can quickly add up — and fewer janitors (etc.) paid at minimum wage could be enough to launch another scholarship or lower tuition a bit. By the time the saleries of several unnecessary janitors (or other) are added up, they could easily equal the sixfigure marks made by coaches.

I think the coach comment is on the mark; these programs need serious cuts. There are several other articles dedicated to that, however, so I won’t run off on that here.

Administrators could be paid on a different basis as well. However, many adminstrators I know and know of came from the corporate world; lower saleries too much and they will return to whence they came.

The government student aid program is part of the problem, rather than the solution. People are encouraged not to save — less savings = bigger loan offers. This should make little sense to someone who looks at the long term, but many do not.

Furthermore, if the cost of the student loan program were not taken out of the pockets of parents before their children college age, they could have invested the money either in their children’s K-12 education or in investment plans (formal or informal) to pay for part of the cost for college themselves. Parents would be less willing to tolerate a 5th year of college because of poor administrative organization and other factors were they paying from savings, rather than dumping a loan on their children.

Government aid is spread without regard to market forces, as commented on by several people here and elsewhere on this website. Banks when loaning money without government interferance would be more capable of making the subtle case-by-case economic adjustments based on job prospects than any government agency or legislative plan.

As for the idea that to cut government aid would lock an entire generation out of higher education, I am confident that shifting the costs in time would not make education impossible — though some would be unwilling to continue under these circumstances. The loans will be there — just undistorted. Besides, under this system, the cost would likely fall significantly, which would reduce the debt burden.

Kevin, Undergraduate, at 7:34 pm EST on November 17, 2005

Optimizing

JMG’s solution for optimizing wouldn’t allow for many teachers and nurses. Obviously the earning power of the B.S/A. isn’t uniformly distributed across all professions. Community college technology degrees can produce incomes higher than B.S/A. Solutions based on aggregates aren’t really solutions — just journal articles.

R.W., Community College, at 12:45 pm EST on November 21, 2005

It’s all about timing. My student loan is locked in at 3%; if the government thinks that’s too low for future generations, I’m cool with raising their rates. (By the way, my house is locked in at 4% and will be paid off soon; I’m cool with mortgage rates going up, too).

Fred Greentree, at 6:35 am EST on February 12, 2006