In praise of Federal loans for College

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The outcry over the growing burden of Stafford student loans is loud and getting louder. A recent Wall Street Journal article characterized it as \”a hot issue in the 2016 presidential race as contenders float proposals that rethink what college should cost and who should foot the bill.\”

Those proposals are likely to involve recommended legislative changes in Stafford-loan policies and federal guidelines on tuition pricing. As mentioned in the Journal article, \”Republicans, who generally point to easy access to federal student loans as the culprit inflating the price of education, are focusing on driving down tuition prices and creating alternative pathways to degrees.\”

The argument goes like this: The federal government makes it easier and less expensive for college students to borrow. As a result, students are able to use more-generous federal-loan subsidies to fund more-onerous tuition charges. If, as the argument suggests, government weren’t so accommodating on the loan side, then colleges wouldn’t be able to increase tuition so exorbitantly.

For this argument to pass muster, two things must be happening. First, student-loan policies must be becoming more liberal. Second, college tuition must be increasing at a rapid rate.

Looking initially at guidelines on federal Stafford loans, I did an analysis of the maximum level of borrowing for which a graduating senior could qualify. It turns out that the maximum was $35,125 from 1995 to 2007. But after that, as a result of the Ensuring Continued Access to Student Loans Act of 2008, there were significant increases in the unsubsidized Stafford-loan limit for undergraduates.

My calculations suggest that graduating seniors taking full advantage of the higher limit could increase their Stafford loans from the previous $35,125 maximum to $40,000 in 2008; to $45,875 in 2009; to $51,625 in 2010; and to $56,500 from 2011 to the present.

As the loan maximum increased, so did student borrowing. From 2007 to 2013, average student debt (federal and private loans) for graduating seniors who had taken on debt at private, nonprofit colleges increased from $27,700 to $34,900, an increase of 26 percent. While the increase is significantly lower than that in the maximum level of Stafford loans, it was still substantial enough to attract the attention of policy makers concerned about the encumbrance that such debt levels impose on graduates.

But those policy makers who also argue that the more-liberal Stafford-loan regulations led colleges to ramp up tuition are wrong. In fact, net tuition (tuition less college-funded discounts) at private, nonprofit colleges from 2007 to 2013 increased only 10.6 percent, from $15,694 to $17,363. That increase in tuition over the six-year period was much lower than the 26-percent increase in average student-debt levels. Not only that, but it was lower than the 12.4-percent increase in the Consumer Price Index, indicating that inflation-adjusted net tuition actually declined during those years.

These findings raise the question of why students are increasing their debt far more rapidly than the increase in tuition would suggest. What, indeed, are students doing with all that borrowed money?

Most likely it is being used to make up for the loss in family financial support over that period, a loss related to the effects of the recent recession and its aftermath. From 2007 to 2013, median family income grew from $61,347 to $64,544, an increase of only 5.2 percent over the six-year period.

Because of this slow growth in median family income, families found it increasingly difficult to fund tuition payments. As a result, some students needed to borrow more to cover the potential shortfall in parental contributions. If median family income had simply kept pace with inflation, as measured by the CPI, this additional borrowing in Stafford loans would not have been required.

For example, if median family income had just kept pace with the 12.4-percent increase in inflation instead of its actual increase of 5.2 percent, median family income in 2013 would have been $68,954, well above the actual $64,544. And if a family that year had put the same 25.6 percent of its income toward tuition that it did it 2007, the sum would have been $17,652 — more than enough to cover the $17,363 average tuition charged in 2013 without need for additional borrowing.

These empirical results indicate that the increases in Stafford loans, accommodated by more-liberal federal borrowing standards, were not used to cover excessive tuition increases at nonprofit colleges. Rather, they were used to make up for the slow growth in family income brought about by weak economic growth.

In fact, the Ensuring Continued Access to Student Loans Act did just that — ensured continued access. Rather than questioning its efficacy, lawmakers should be celebrating this legislation, which was crucially important in ameliorating the financial effects of the recession on college access.

The Federal Reserve Board of San Francisco concluded a year ago that the annual earnings premium of college over high school graduates is $28,650. Through a retirement age of 67, this average annual premium results in a lifetime earnings premium of $830,800 for college graduates. The fact that Stafford loans made it possible for many students to have access to college and earn such a premium points to the fact that these loans resulted in high rates of return to student borrowers and our nation as well.

Author Bio: James L. Doti is president of Chapman University.

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