Government Subsidized Student Loans Have Economic Costs dissertation

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Government Subsidized Student Loans Have Economic Costs but Political Benefits

Higher education has become increasingly important in the contemporary world scenario today where globalization has led to a higher need for a skilled labor force that is mobile and that is well-versed in the academic disciplines followed all over the world. In fact university education is starting to be seen as a hallmark for success, even though there are college drop outs who have become billionaires.

The recent spate of universities and higher education institutes has led students and their parents to believe that university education is mandatory for all those who want a nice career and income in their lives, and has increasingly blurred the distinction between necessary and mandatory education, compared to professional education that is mainly to benefit the individual.

In light of this dilemma, yet another question arises of helping students gain this education with the availability of subsidized student loans. This issue has gained precedence in the preceding years as the tuition fees have escalated and America is battling a recession, with several policy considerations to keep in mind.

This paper has looked at the legislation that allows these loans and the various other kinds of loans and alternatives that are available to students that help them meet their financial needs. The paper then looks at the specific amendments that the Obama government has proposed including larger Pell Grants, an expanded income-based repayment program as well as the fact that the government is talking about eliminating middlemen and providing loans directly to students.

The economic analysis in terms of costs and benefits to individuals and country concluded that subsidies have led to moral hazard while the quality of education as well as the numbers graduating has gone down. Additionally, the subsidies have led to misallocation of resources as more and more colleges are popping up to take advantage of federal money, while the rest keep on hiking up tuition fees in a bid to get their students to apply for more financial aid, and hence more dollars. The subsidies therefore are indicated to be the reason why the fee is increasing by leaps and bounds.

The political analysis of the loans and subsidies follows, where candidate looking for popular votes are not indicating the economic costs of subsidies and are looking at direct loans or lack of federal intervention, leaving the higher education sector up to their own market devices.

Finally the statement that current presidential candidates have made is mentioned, along with a running analysis of what these entail. The paper then concludes by agreeing to the hypothesis that while the education subsidies have high economic costs, it is the will of the politicians that prevents them from taking any radical measures to free the industry from intervention.

Calls have been made to regulate the higher education industry and to prevent them from raising their tuition fees to exorbitant levels, but the idea that the subsidies are accruing a great cost to the economy is valid. Experts fear financial suffocation of students, who upon finding access to subsidized loans easy enroll in colleges, only to emerge with a mounting debt burden, and in some cases a degree they don't even need. Analysts are indicating that the student loan bubble might burst with implications that will be similar to what happened in the housing crash, and in light of this there are alternative discussed which look at how the subsidized loan regime is expected to change.

The paper is indicative of the real life trade-off leaders and publics have to make, and concludes with the predictions of what the future of these subsidies is going to be like.


Executive Summary 2

Introduction 6

Government Higher Education Loan Programs 13

Stafford Loans 16

Federal student loans to parents 17

Federal Direct Student Loans 17

Private student loans 18

Private student loan types: 19

Recent Legislation in Student Debt Laws 22

Larger Pell Grants 23

Expanded Income-Based Repayment (IBR) 24

Other Student Loan Facilities 25

Economic Analysis of Loans 26

Individual Benefits and Costs of Debt Burden 28

Benefits of subsidized loans to individuals 28

Costs of Debt Burden: 30

Country's Benefits and Costs of Subsidizing Student Loans 32

The benefits of subsidizing student loans to the country 32

The costs of subsidizing student loans to the country 35

Political Analysis of Loans 37

Politicians/parties most closely associated with programs 39

Arguments used to support programs 44

Past experiences of those trying to cut programs 45

Current candidates' statements on loans 47

Summary Analysis 51

Review 52

Future predictions 54

References 59


This paper will look at the higher education sector with particular emphasis on financing of studies in these places. It will then set to argue that although there are high economic costs associated with subsidies, there is political will for these loan subsidies to continue and they will.

Education, defined as the process of receiving teaching, training and learning by the Oxford Advanced Learner's Dictionary ( Oxford Advanced Learner's Dictionary), has largely become a discipline of national concern. While primary education is compulsory and paid by the government, higher education too, is being considered increasingly to be within its domain, under the 'No Child Left behind Act'. As the U.S. government is intervening more in the matters of higher education it has given rise to a debate as to the advantages and disadvantages of such an intervention, and it has risen to public importance as the government, in an aim to popularize university education facilitates students by providing them with subsidized loans for their education.

Student loans are an instrument with which the government tries to make acquisition of higher education easier as costs of acquiring university education escalate, to the current average of $35,000 per annum. (Kogan, 2011) The plan under which students are given education loans is the Income-Based Repayment System which works as an easy installment method of loan repayment through which students can better match their loan repayment installments to their income.

One of the methods in which the government has subsidized loans and make it easier for students to acquire university education include the 2009 proposal by President Obama which was geared towards the elimination of loans through private financial institutions such as Sally Mae, and reallocating them as federal loans or direct loans, straight from the government treasury. Additionally Pell grants, which are need-based grants given to low income students pursuing higher studies were proposed to be increased and making the Pell grants an entitlement program that would not need to be budgeted separately by the Congress. (McCluskey & Edwards, 2009)

Additional measures have also been taken by the government that have further intensified the debate against and for government subsidized loans. These include acts such as grants and assistance for military personnel pursuing university education as well as granting an additional sum of $30 billion aimed at furthering research at universities. Breaks in the income tax code have increased as a result of these government policies which include lifetime learning tax credit, scholarship and educational facility bond. Moreover, both the Republicans as well as the Democrats seem to be pro-this policy, therefore whichever government comes into power, student subsidies are expected to remain, and in some cases increase in number. This can be proved from the fact that where there were 7 special breaks in income tax code in 1995, there were 16 in 2009.

There are arguments in favor as well as against this stance where this paper aims to analyze in detail what the specific advantages and disadvantages are in terms of economic costs and benefits, and in terms of political costs and benefits.

Some of the key figures that support this argument are that according to UNESCO, each additional year of schooling increase GDP growth by about 0.37%, and that an additional year of schooling increases an individual's income by 10%, implying that expenditure on education is a worthwhile investment that can help in eliminating many social and economic issues that are faced by the world today. (United Nations Educational, Scientific and Cultural Organization, 2011)

With particular reference to student loans, proponents argue in favor of the student loan subsidies where the subsidies are expected to encourage spending on ailing sectors, and as the spending increases, the proponents argue that jobs will be created and the economy will get a boost. Democratic Congress representatives such as Hansen Clarke are also proposing this view the subsidies are expected to boost graduates in being able to invest in business rather than spending much of their initial income in repaying the loan. There is also the advantage that graduates, in order to repay their loans seek immediate employment, which leaves them with no room to experiment with their own ventures, limiting entrepreneurship. Hence, subsidized governments loans can help them repay their loans early and invest themselves in new businesses that can help create more jobs in the economy and pull it out of recession. (Wolfers, 2011)…[continue]

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