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Expanding Federal Loan Program May Be Hurting College Students

Jim Bach
The Diamondback
August 30, 2012

Gina Cairney needed several student loans to graduate from this university. But paying back those expenses is weighing heavily on her mind now that she’s still searching for a permanent job three months after graduating.

“Budgeting is very important and it probably takes up a lot of my time to make sure I can pay for everything,” said the journalism graduate, who has about $25,000 to repay in both government and private loans. Cairney added that the government’s lender program, with its lower interest rates and monthly payments, was an enticing option that helped her through college. “Without the federal loans, it would probably have been pretty tough.”

The debate over federally subsidized student loans came to the forefront this summer when Republicans and Democrats in the U.S. Senate sparred over how they would fund the nearly $6.7 billion program, ultimately compromising to freeze interest rates on subsidized student loans another year. Both President Obama and presumptive Republican presidential nominee Mitt Romney voiced their support for the extension of the program during the debate.

However, some experts have suggested the program has been a catalyst in fueling the rise of tuition costs and has extended loans to student borrowers who lack the means to repay them after graduating. As the federal government grows the lending program, it pushes up demand for college education and the number of graduates seeking a job at a rate much faster than employers are hiring, said Cliff Rossi, a teaching fellow at the business school.

“Any time you provide the means for which people can pursue higher education, it creates an artificial demand,” Rossi said. “Because of that additional supply of financing for student loans, it gives the universities and colleges the ability to basically raise tuition costs.”

Michael Finger, a communications specialist at brokerage firm Euro Pacific Capital Inc., said there is no real solution on the table. And with both presidential candidates supporting measures to extend the program, the workforce could become saturated with graduates who, because of large debt burdens, are less likely to start businesses and would instead take lower paying jobs to the detriment of the broader economy.

“The ticket on neither party is serious about addressing the issue,” Finger said. “Essentially what they’re doing is making these kids ‘debt slaves.’”

And Cairney experienced the anemic job market after graduation firsthand. She had to settle for a paid internship out of college to get by, and has to monitor her finances carefully.

“It just seemed like when I was doing my job search, they just wanted interns, and most of them were unpaid,” she said.

Finger added the federal government should pull out of student lending altogether, leaving it to the private marketplace. The federal government issued 93 percent of student loans last year, while it only issued about 75 percent between 2006 and 2009, according to College Board.

Those struggling to pay for college could take a hit if the federal lending program is abandoned, Rossi said, but the program does need to be more particular about to whom it issues loans to keep from fueling a “student loan bubble.”

“We can’t afford to just pop it and take everything away,” Rossi said. “We have to have some sort of program out there; a limited federal assistance program out there for folks that are eligible and needy for those kinds of programs.”

This state has stayed below the national average for student loan debt, an accomplishment university President Wallace Loh commends.

“The bottom line is, because the state has protected higher education in Maryland, there are far fewer students who are hurting than compared to students at our peer institutions in the United States,” he said.

But if more students continue to default on their federal loans, the country could face another economic collapse, Loh said. Default rates jumped to 8.8 percent in 2009 from 7 percent in 2008, according to the most recent Department of Education data.

“If students start defaulting on their debts, we’re going to have a crisis as large as the mortgage crisis,” Loh said.