A professor from Ohio University, Richard Vedder, suggests that the government get out of student loans altogether1 and just focus on more grants for low-income students. Sounds good on paper, but relying too heavily on grants adds a lot of problems to the equation:
Short-Term Shock on Government Budget
The first and most significant effect of relying too heavily on grants is the sheer stress it will put on an already tight budget. Student loans will allow the government to regain a portion of its expenditures in the years after a student graduates instead of relying solely on taxes generated from a working graduate.
Needy but Not Poor Families are Left Out
Just because a family is not in the poverty level does not mean it is not experiencing hardship. There are certain families stuck in the middle. Too rich to qualify for aid but too poor to afford college on their own, student loans offer a decent middle-path for these families to obtain a college degree.
Steep Rates on Private Loans
If an interest rate of 6.8% on Stafford Loans is scaring everyone, then an interest rate of 10% to 12% on private student loans should just plain terrifying. Sure, some lenders match the 6.8% for those with excellent credit scores. Some even charge less interest. But the problem is that not everyone has a FICO score of 800 or more.
“Opaque” Private Student Lender Practices
The last but most important reason why government should not get out of the student loan business is the sheer mystery behind private student loans. These lenders juggle student loans to other financial institutions. If a borrower comes across a problem and needs to find out who he owes money to and how much he actually owes, chances are he won’t find a darned thing about it all.
So no, the government should not back out of the student loan industry. Its vested interest is to see Americans get jobs and pay taxes for the rest of their lives – not to rip them off with bad loans.