Make Student Loans Work for Students

Amid the debate over student loans — President Joe Biden’s administration tried and failed to forgive some of the debt, which starts accruing interest this month after a three-year pause — a crucial question has often been overlooked: Who benefits the most from student loans? It’s not necessarily the students.

The main beneficiaries are colleges and other accredited post-secondary educational institutions, which receive the loans as transfers from the federal government via student borrowers. There are few strings attached. Colleges do not pay the loans back, nor do they pay interest to the government. Students do that.

Yes, students benefit from going to college, but not always. A Federal Reserve survey found that about half of the respondents who went to college said the lifetime financial benefits of their education were about the same as or less than the lifetime financial costs. Those with outstanding student loans were even more pessimistic.

The financial costs of college have risen substantially in recent decades. Overall consumer prices have quadrupled since 1980, but tuition and fees are 16 times higher, with the fastest growth since the early 2000s. The rise in tuition has been matched by a rise in student loan debt, currently at $1.6 trillion.

Research suggests that higher student loans lead to higher tuition, creating a spiral of financial costs. For every dollar of subsidized federal student loans a university received, according to one study, it raised its tuition by 60 cents. And while another study found a smaller effect of student loans on tuition, and one that varied over time, it stands to reason that the structure and wide availability of the federal student loan program make it easier for colleges to charge high tuition rates.