Student Loans – Suggested Economic Reform

How does a 8.5% T-bill sound? Well that’s essentially the deal the banks holding your student loans are getting from the federal government. As interest rates on T-bills hover around 0% (you read that right), the government is offering banks who loan money to students up to 8.5% interest and a government promise of full repayment.

So how did this absurd result come about?

As if often the case it began with the best intentions. The drive for economic equality and merit in the world of elite colleges likely started what would become a vicious inflationary cycle in college tuition costs.
The College Scholarship Service of 1954 was a board of private institutions intent on increasing merit-based education by removing financial considerations from college selections. The federal government officially entered the student loan arena in 1958 in response to national defense fears that our county was failing in the arenas of math and science. Such failure was evidenced by the Soviet launch of Sputnik. This, combined with the war on poverty, provided a strong basis for the entry of the federal government into the student aid arena via the National Defense Education Act of 1958. This was a program offering of low-interest student loans (to become the Perkins Loan) (Archibald 2002).
The Middle-Income Assistance Act of 1978, further widened Pell Grant eligibility, and middle class access to government assistance. However, it was the spending cuts under Regan that shifted American students to more loan focused assistance in contrast to the prior grant based federal assistance. In 1993 the federal government further increased the borrowing limits for federally subsidized student loans. However, it was not until 1997 that we saw tax cuts for college expenses. This was the first instance of non-need-based federal aid, and thus the first wholesale government endorsement of consumer spending on higher education.
Over the last 25 years college costs have increased at a rate of roughly 6.68% the CPI adjusted inflation over the same period was 3.23%. Thus over the past 25 years college costs have outpaced inflation by an average of 3.45%.

Who is hurt most?

Unfortunately, in order to sustain such equality in light of increasing costs the government has been forced to secure an ever-increasing amount of student debt. Accordingly the government has become highly reliant on a public private partnership for such lending. Thus, enter the sweat deals banks are currently being offered. In exchange for student lending banks are allowed to charge up to 8.5% interest on certain student loans, and the government promises full payment in the unlikely event of any loan default. The government interest in this partnership, and their interest not ultimately footing the bill, has lead to strict rules regarding discharge of any student debt. Online blogs abound with tragic stories of failed stories of discharge tried in Federal Courts.
New students are then forced into a gambler’s choice of accepting massive amounts of non-dischargeable student debt in the hope of securing a high paying job, or forging the college choice for a career in say, the military or labor sectors. Unfortunately, for recent graduates the gamble is not paying well. With general unemployment around 10%, it is estimated that unemployment among recent college graduates is approximately 40%. Many students supposedly employed are, in reality, either grossly under-employed or earn salaries far below what would be necessary to service their educational loans.
However, recent graduates may prove to only be the short term losers, the American public will almost certainly loose the most in the end. The Wall Street Journal recently reported that American student loan debt has exceeded national credit card debt. With many calling for a student loan bailout, our next financial crisis may be looming.

If equality is the game, let everyone play

If equality is the game than the government should allow more individuals to buy and trade student loan debt. By selling treasury style student loan bonds the government would in fact benefit students through facilitating lower interest rates and providing a centralized location for students to view and pay their debts. (Currently students are faced with the complexity of navigating individual lender sites as well as determining what lenders in fact own their debt as such debts are routinely sold between banks.) Furthermore, potential students may make more market based decisions to attend colleges. As an added benefit, such a platform would also offer grater transparently on total government liabilities. However, such an idea may be unpopular for fear of cannibalizing demand for T-bills. But, hey we can only be so equal.

Dave represents clients in Minnesota on a range of legal issues, including civil litigation, business ventures, and creditor relations. He also has expertise raising capital to finance David v. Goliath cases. (Yes, pun intended!) Dave can be reached via email at

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