Policy Documents

Student Loan Update

Matthew Glans –
August 23, 2008

One of the great tragedies affecting higher education today is the overpricing of an education that carries less and less value. Reliance on government aid by institutions that make student loans ultimately encourages poor spending habits, stifles financial innovation, and discourages prudent long-term saving by students and their parents.

The credit crisis has had a significant impact on the private student loan industry. Banks have become increasingly risk-averse, raising their loan qualification standards to levels that many consumers are unable to achieve. Despite the recent difficulties of the current crisis, total borrowing through private student loan companies grew by almost 900 percent over the past 10 years.

The number of students seeking financial assistance has grown with the rising cost of higher education. Despite these rising costs, the student loan "crisis" may not be the catastrophe the industry is portraying it to be. Higher education has a spending problem, and it is trying to pass its own excesses onto the government and taxpayers. Representatives of the student loan industry claim their market is teetering on the verge of crisis, with students and their parents finding it increasingly difficult to obtain student loan financing at the low subsidized rates of the past.

Given the recent bailout trends with Fannie Mae and Freddie Mac, a government bailout of student loan providers is a strong possibility if the market continues its downward trend. A bailout of the student loan industry would place additional financial risk on taxpayers and would serve only to reinforce the underlying spending addiction in higher education.

The following articles address these concerns and examine the student loan debate from a free-market perspective.


Making College More Expensive: The Unintended Consequences of Federal Tuition Aid
http://www.cato.org/pub_display.php?pub_id=3344
This Cato Institute Policy Analysis examines the role federal tuition aid plays in higher education. Economist Gary Wolfram argues for less federal spending for student aid.

The Credit Squeeze and Student Loans
http://projectonstudentdebt.org/squeeze.vp.html
This article, written by the Project on Student Debt, examines the effect the credit crisis has had on the availability of student loans.

House Panel Addresses the Would-Be Student Loan Crisis
http://www.usstudents.org/press-room/articles/april-2008/house-panel-addresses-the-would-be-student-loan-crisis/
This article examines in greater detail some of the policy proposals under consideration by Congress and questions the severity of the student loan "crisis."

What Does 'Sustainability' Have to Do With Student Loans?
http://www.nas.org/polDoc.cfm?Doc_Id=173
This article, published by the National Association of Scholars, discusses the sustainability--or lack thereof--of the current student loan system, claiming students today receive little value from an overpriced and overvalued higher education system.

Every University a Junkie
http://www.cato.org/pub_display.php?pub_id=9431
Neal McClusky of the Cato Institute describes the growing codependency between the government and college institutions, citing the recent "crisis" as simply the most recent incident in an addictive relationship, all at taxpayers' cost.


For further information on the subject, you can visit The Heartland Institute's Web site at www.heartland.org, where you will find articles on the issue available through PolicyBot, Heartland's free research database.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Legislative Specialist Matthew Glans at 312/377-4000 or mglans@heartland.org.