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Student Loans: Do They Really Help Students And Make Economic Sense?

Student Loans: Do They Really Help Students And Make Economic Sense?
Innovation

Are student loans and education debt leading us to a looming crisis?

Naresh Kumar
  • 17 may 2010

A guest post at the Christian Science Monitor argues that the student loan market is a flawed business model and will eventually create a massive negative impact on other industries. It debates that it is almost immoral to allow children to finance their college education, only to start their lives (after graduating out) immersed in debt.

CSM explains:

A boost in educational funding for financing may come at a price. If the current trend continues, students will increase the amount financed and they will be paying for the majority of their education in loans. As the January 14 edition of the Economist notes, “only about 400,000 more Americans were employed in December 2009 than in December 1999, while the population grew by nearly 30m.” With an unemployment rate of 10% (real figures are closer to 17%), matters look only more ominous.

Millions of students will graduate with the same popular majors and compete for fewer jobs because a significant amount of manufacturing and industry has left the United States. The supply of students entering the job market will be endless, and businesses will lower the base pay of new employees because of their abundance.

The other scenario is that businesses will not hire them at all because they are fully staffed, thus creating a bottleneck in the job market. Unemployment, Social Security, and Medicare will all suffer from the supply and demand effects of this type of crisis.

To make matters worse, not only does education debt affect students, it also passes the loan obligation to the taxpayer.

Payments will have a threshold of 10% of a graduate’s disposable income and will be forgiven after 20 years while a public servant will be forgiven after ten. The risk associated with loan obligations are shifted to the taxpayer. Consequently, the act (Health Care and Education Reconciliation Act of 2010) removes obligation and creates a moral hazard with the creation of a virtual backstop. With the combination of this backstop and decreasing wages because of an oversupply of workers, the result can only perpetuate default. This bursting bubble will be massive and will affect other major industries such as housing, auto, and credit.

The post concludes by saying that student financial assistance through government intervention does not perform as aimed and that the program will actually only hurt the people it is trying to help.

CS Monitor: “One diploma and a whole lot of loans”

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