The Case for Ending Student Loans

April 16, 2013 | Blog

Sometimes public problems deserve massive public solutions. This is one of those times.  

As I explained in my testimony to the U.S. Senate HELP committee this morning, student loans have been a requirement for college attendance in the United States.  It is no longer possible for the vast majority of American families to afford college without taking on debt.  It isn’t a “choice.” While we can disagree about whether or not the personal benefits of that debt are “worthwhile,” the policy question is whether the social consequences are tenable.
I argue that they are not.  While the average student loan debt under income-based repayment plans may be “manageable” under current financial industry standards (meaning it represents no more than 10% of annual income) that does not mean it has no negative impacts. (The evidence is far from clear that the debt will in fact be manageable– the Australians are reportedly amazed that we think lessons from their experiences can reasonably be imported to our very different country and higher education space.)   Having student loan debt very likely decreases the likelihood of borrowing for other things, including buying a home, starting a family, and other hallmarks of American middle-class life.  It also comes with a special kind of stress, as it is not dischargeable, ever, even in death. 
Even more importantly, loans have facilitated bad behaviors on the part of colleges and universities that have other wide-ranging social effects. For example, by attaching a large monetary value to each student, they encourage colleges to enroll students and not spend money to serve them well. They have enabled the expansion of prices affecting even those families who do not borrow.  And they perpetuate the long-standing but ill-supported argument that the private benefits of education outweigh the social benefits (the truth is that the former are measured more accurately and more often than the latter, so comparisons are not yet possible).
Milton Friedman is the godfather of the student loan crisis in higher education.  The same man who created the voucher system destroying our public schools and much of Latin America began advocating in the 1960s for a free-market approach to higher education financing that would shift the burden of funding college from government entirely to students– this was his explicit goal. Incredibly, he also managed to convince people that this would be more equitable than the alternative of charging everyone less.  Only a market devotee and a political ideologue more committed to theory than evidence would do this.  But many economists around him were convinced and helped to push for the “Middle Income Student Assistance Act” of 1978 which originated the guaranteed student loan program in the name of “choice.” Unsurprisingly, the private colleges and universities and the burgeoning proprietary sector were major supporters.
The student loan crisis we now experienced is therefore a manufactured one.  It was an enormous mistake to shift the focus of financial aid from access to choice, and a mistake we must undo.  Here are the next steps:
1. The reauthorization of the Higher Education Act of 2013 should end the guaranteed student loan program.  Private banks will not see funding student loans as a good deal, and they will eventually disappear.
2. Stripped of loans as a way to finance college, families and students nationwide will immediately look at the costs of attendance at our colleges and universities and express outrage– outrage that is long overdue.  They will demand that their state legislatures driven down those costs immediately. These voices will be loud, numerous, and powerful.
3. State legislatures will respond, acting to force down the costs of attendance at their public colleges and universities by increasing income taxes and devoting more appropriations to funding them.  They will not simply starve the public colleges and universities because the public will not demand it– families and students will not abide by seeing the quality eroded. They will learn, fast, that price and quality are not one and the same.
4. With prices substantially lowered at public institutions, the different between public and private colleges and universities will be quite large.  Privates will either respond by lowering their prices (unlikely), standing firm, or closing.  The latter would be just fine– private institutions should operate only where the market demands it, there is no need for government subsidies.   Nearly all for-profit institutions will close as well.
5. Without student loans to pay for the costs of private education, students entering the private sector will mainly be wealthy, just as they are in k-12 private schools. However, given the widespread belief among private institutions in student diversity and their social justice commitments, these institutions will continue to use their endowments to provide scholarships.  Pell Grant recipients attending private institutions will have those additional funds to support their needs at those more expensive schools.
The result: a strong public system of higher education sufficiently resourced to educate the masses, and a smaller array of private opportunities for those who can afford them or whom private colleges deem worthy of sponsorship.  A college education for all without debt.  Sufficiently lowered prices to make covering the costs unmet by grant aid with a modest amount of work. 
Am I honestly suggesting we go “backwards”? No.  This isn’t regression, this is progression. We tried out Friedman’s ideas, and they failed, exacerbating socioeconomic inequality in education outcomes, and running millions of Americans into debt.  His approach benefitted private interests, not public ones.  That’s precisely what he meant for them to do– and we collectively fell for it.  Having learned our lessons, it’s time to rethink the entire approach and move forward. 
Please, tell me what you think. It’s a conversation worth having. 


  1. Reply

    Jon Boeckenstedt

    April 17, 2013

    If you're trolling, I'm a sucker who has taken the bait. But if not, I think you're a bit off in either your assumptions or conclusions, or both. Either way, I hate it when I post something provocative on my blog and no one responds...

    This seems to be a solution in search of a problem. First, only about 2% of students borrow $50,000 or more. Those who do borrow responsibly essentially decide to invest (or forego) the cost of a mid-sized sedan over 40 years of earnings. That seems like a reasonable trade off.

    But if your assumption is that state flagship institutions are somehow the safe harbor for low-income students, I think you might do well to check your data. Every state that has conducted the study that I'm aware of (starting with Minnesota in the 90's) has found that the median family incomes of students at state flagships are actually higher than at the state's public flagships. If the scenario you describe takes hold, the wealthy (who have the advantages of the better schools and the resultant higher test scores that prestige-obsessed publics crave, despite their missions), will be the winners in the state school admissions lottery, and the situation will become worse, becoming even more like what Tom Mortenson calls "Higher Education's gated communities." UW Madison already enrolls more rich kids than Marquette; this would make it worse.

    And do you really think state legislators will dramatically drop the cost of education? Is there any evidence that there's a willingness to do it? The trend would be the opposite, I think.

    If, resultant of this, there is even less money for education (the only way you cost less is to spend less or to get more government money), states would likely choose instruction over research (this is essentially what has already happened). Nothing wrong with that, until you try to recruit and retain faculty to "research universities" by telling them they have to teach nine sections of undergraduates each year.

    But ultimately, if you believe a market-based system is the fairest and most equitable, then take away all government funding from state institutions, and let us all play on the same field. Free markets assume fair competition.

  2. Reply

    Thomas Watson

    April 24, 2013

    The real problem with easy cash is that it drives up the cost of education. Costs of higher education have soared over the last few decades as colleges have little incentive to cut costs. There will always be more 20-somethings that will bring more money.

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