While conservatives and progressives don’t tend to agree on many things these days, there is one area where they might be able to agree – and that could lead to poor policy. Both sides agree that the country is in serious debt, but they disagree on how to solve it. Many progressives support debt forgiveness and free college. However, many conservatives would prefer that the government stop making loans that cause price and degree inflation. They also want strict criteria on who is eligible for loans. Both sides agree that student debt and the federal loan program are fundamentally flawed.
However, the evidence regarding educational loans is showing us something else. It shows that student loans can help students get a degree and reduce their debt. Some students may also benefit from borrowing more. These studies confirm that the original purpose of government-issued student loans was sound.
The private market will not provide student loans at affordable terms due to a variety of factors (e.g. They can’t be secured, creditworthiness information is difficult to get), but the loans are a great financial investment for students. In other words, loans are often better for students than borrowing them. However, private lenders will not take on that risk. At least, they won’t do so at large and at reasonable terms for students. Without a government program, there won’t be many good investments in education.
Researchers can compare the outcomes of students who are offered loans by government colleges to see the benefits. Because too many students could default, some community colleges choose to opt-out of the loan program. Federal sanctions could mean that students are not eligible for loans and the federal Pell Grant.
This natural experiment was conducted in a Southern state in the 2000s after several community colleges had opted out of the federal loan program. The researchers found that students borrowed less at non-participating schools and completed fewer credits their first year. This was especially true for science and math classes.
Recent research has shown that students were able to borrow more and increase their bachelor’s degree completion rates by increasing the federal loan limit in 2008 and 2009. This led to substantial long-term earnings improvements. It is important to note that borrowing more didn’t affect borrowers’ financial status or increase defaults. This had no impact on homeownership rates.
A second study at a large community college produced similar positive results, but it was based on a more deliberate experiment. Two groups of eligible students for federal loans get to offer different options in a random trial. One group received no federal loans in financial aid award letters, but could opt-in for loans if necessary. The other group gets $3,500 as the default amount.
Researchers found that students who were offered loans in financial aid letters were 40% more likely than others to borrow. There were also positive effects, just like the previous study. Borrowers had higher GPAs and completed more credits. They were also more likely to transfer into four-year colleges.
Studies suggest something interesting
These studies both suggest that loans are good for students in general. However, they don’t refute the popular notion that students overborrow and should be more careful about how much they borrow. Another study is needed to confirm this. Researchers found that students make poor decisions about borrowing amounts. They provided counseling to randomly selected students at community colleges. This is to help them to make better borrowing decisions.
These students were also less successful academically, failing more courses. This led to lower GPAs, and credit earned. These students also defaulted on loans at higher interest rates. This is a reminder that, while it is admirable to reduce student debt, it should be managed with care lest it decreases the chance that students will earn a degree and make repayments even more difficult.
No definite answers
These findings do not necessarily mean that student loans are the best way to pay for higher education, or that more debt is better than less. These studies primarily focus on the short-term effects of student loans for undergraduates. All were made in public institutions. Studies that examine other types of colleges and graduate students are not available.
However, some evidence suggests that students attending for-profit colleges may not be able to benefit from additional debt. Recent research shows that nearly all of the worrying rise in default rates over recent decades is by postsecondary institutions (mostly for-profits) that are “high-default”.
These results do not tell us if student outcomes would be different under a different policy like “free college” and mass loan forgiveness. They also cannot tell us whether these policies are worth the extra costs.
Even with these caveats, the evidence suggests that policymakers should exercise caution when considering student loan reforms. Students who believe that student debt is always bad are at risk of being left worse off by policies that promote this belief.