Research & Commentary: Student Loans

Published June 6, 2008

The credit crisis has had a significant impact on all aspects of the economy. Banks have become increasingly risk-averse, raising their loan qualification standards to levels that many consumers are unable to achieve.

One sector of the lending market that has received especially close attention by the press in recent months has been the student loan market.

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. Lenders say the costs of higher education are skyrocketing beyond their ability to finance, and without help from the government to stabilize the market, many students will be unable to afford a higher education.

While the cost of attending college is undoubtedly high, the student loan “crisis” may not be the catastrophe the industry is portraying. Higher education has a spending problem, and it is trying pass its own excesses on to the government and taxpayers. According to the Cato Institute, over the past 10 years after-aid educational costs including tuition, fees, and room and board increased 24 percent at private four-year colleges, and 35 percent at public institutions. Over that same period, however, federal aid to higher education increased 77 percent, from $48.7 billion to $86.3 billion.

The federal government recently removed many of the incentives it once provided to entice private lenders to take on student loans. Some observers are suggesting the student loan “crisis” is an attempt by lenders to restore those subsidies. But this reliance on government aid ultimately encourages poor spending habits, stifles financial innovation, and discourages prudent long-term saving by students and their parents.

One of the great tragedies affecting higher education today is the overpricing of an education that carries less and less value. Eliminating subsidies would allow free-market forces to take hold, encouraging educators to provide a better product at a reasonable price.

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

Media Exaggerate Student Loan ‘Crisis’
Julia A. Seymour of the Business & Media Institute examines the media’s role in overestimating a student loan “crisis.”

Making College More Expensive: The Unintended Consequences of Federal Tuition Aid
This Cato Institute Policy Analysis examines the role that federal tuition aid plays in higher education. Economist Gary Wolfram argues for less federal spending for student aid.

The Credit Squeeze and Student Loans
This article, written by the Project on Student Debt, examines the effect the credit crisis has had on the availability of student loans.

Response to the Boston Globe on the Student Loan “Crisis”
Deanne Loonin, director of the Student Loan Borrower Assistance Project, comments on the recent media coverage of the student loan “crisis” and describes how the information can mislead parents and students during a loan search.

House Panel Addresses the Would-Be Student Loan Crisis
This article examines in greater detail some of the policy proposals being proposed by Congress and questions the degree of the student loan “crisis.”

What Does ‘Sustainability’ Have to Do With Student Loans?
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
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.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact me at 312/377-4000 or [email protected].