Private sector needed to fix student-loan crisis

The Senate reached a student-loan agreement Wednesday after months of bickering over federal interest rates. Unfortunately, few are willing to consider a complete privatization of student loans.

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Behavioral psychologists often speak of “positive reinforcement” as a means of encouraging responsible conduct. Examples of positive reinforcement include teachers giving stickers to students that ace spelling tests or parents that treat their children to hours of extra video gaming for defending a student bullied on the playground.

Unlike these reward-based scenarios, federal student loans — the interest rates of which are sometimes greater than private student loans — are doled out based on a federally mandated formula meant to measure need rather than merit.

According to the Free Application for Federal Student Aid (FAFSA) website, the Estimated Family Contribution (EFC) is “a measure of your family’s financial strength” and is used to calculate a student’s so-called financial need. It takes into consideration the number of siblings enrolled in college, family size, taxed and untaxed family assets and benefits, without considering possible outliers. The EFC is then subtracted from the cost of attendance at the school to which a student has applied, and the balance of the two numbers is considered the measure of a student’s financial need.

The smaller the EFC the better the financial-aid package, and vice versa. In other words, the more financially sound one’s bank account, the less likely one is to qualify for federal grants or student loans — a program counterintuitive to the advice of behavioral psychologists worldwide but that government officials have been subsidizing for decades. The result? A multi-billion dollar federal student-loan program with approximately 10% of those who entered repayment in fiscal year 2008 in default — a number twice the 2005 cohort default rate of 4.6%, according to a U.S. News and World Report article from July 17 titled, “Report Reveals Student Loans, College Aid on the Rise.” Other consequences include college and university degrees 12 times what they cost to obtain in 1978, according to Bloomberg.

As the editors at National Review Online recently put it, college and university administrators need to get behind their curricula and not rely on the federal government to buoy salaries.

“If universities are confident enough that the value of their product is sufficient to justify the associated financing cost, then they should get into the lending business themselves, in the same way that automobile manufacturers set up finance companies to help consumers buy their products,” National Review Online recommended. “But the universities are not eager to get into that business, suggesting that they know that there is in fact a disconnect between price and value in the higher-education market.”

In doing so, the federal government would better avoid budgetary uncertainties associated with federal student loans, avoid punishing financial stewards and affirm the belief that higher education is capable of standing on its own two feet. The private sector would be more efficient at drumming up scholarships for students regardless of whether they fall into the parameters of a one-size-fits-all formula for federal student aid.

Carolyn Bolton is a content editor at Rare. Follow her on Twitter @carbolton