Student Debt

Student Debt

Introduction

The last decade has witnessed particularly significant increments when it comes to student debt with two main components that have ended up attracting significant attention. Overall outstanding current student debt has overshot the entire credit card debt. The level has already passed the one trillion dollar mark by 2013. The increase in the level of student debts has had a profound effect on the borrowers and the economy of the country. Most students are financing loans and this hinders them from investing in major projects such as owning homes. This paper addresses the student debt issue and offers solution to the problem.

The general dialogue on student loans usually compares education loans with credit card debt. As a matter of fact, the local media houses surprised the public by indicating that the total unpaid education loans surpassed overall unpaid credit card debt. However it is crucial for both policymakers as well as individuals to realize that the much talked about student debt is not the same as credit card debt. When we look at debt, debt is viewed as a tool which allows someone to use more items today through taking some money from his future endeavors (Brown, 40). Of course, we are not able to travel into the future ourselves meaning that we now have to rely on the lender in order to make the transactions a possibility. Practically, a debt or loan is referred to as an agreement that is between a lender and borrower. It is however crucial to have in mind that such a loan is actually a financial transaction between a person and her future income.

Education, just like a house, is a close combination of consumption and investments. Post-secondary education is deemed as an investment since it is normally expected to increase the students’ foreseeable likely average income. The consumption segment of a post-secondary education is inclusive of all the costs which are not firmly part of the experience which contributes to higher future incomes. The tuition segment which pays for attractive leafy colleges, student centers, extracurricular engagements as well as sporting facilities are deemed to be consumption to the extent that these expenditures do not end up increasing what the students are expected to eventually earn after they finish up (Eisler, David and Scott, 380). Such a particular combination of consumption and investment notably varies across the different campuses. Some of them may appear like summer engagements which offer post-secondary classes while others may offer much more basic experiences.

The student lending system should be reformed to give the students more benefits and accrue more advantages after their higher education. The students are supposed to be protected from the risk that is inherent in borrowing to finance their education. The graduate students should not be permitted to make predictably poor decisions like borrowing to earn a degree that has fairly low labor market prospects or success rates.  The government could also increase subsidies in the higher education sector to make sure that the students are not subjected to prohibitive tuition rates. However, the government student lending systems are supposed to be cost-effective so as to protect the taxpayers to the greatest extent. Just because the federal government is in a stronger position to make risky loans than the private sector does not mean that it is supposed to do so at every opportunity it gets.

The student lending system should be reformed to give the students more benefits and accrue more advantages after their higher education. The students are supposed to be protected from the risk that is inherent in borrowing to finance their education. The graduate students should not be permitted to make predictably poor decisions like borrowing to earn a degree that has fairly low labor market prospects or success rates.  The government could also increase subsidies in the higher education sector to make sure that the students are not subjected to prohibitive tuition rates (Delisle, Phillips, and Linde 45). However, the government student lending systems are supposed to be cost-effective so as to protect the taxpayers to the greatest extent. Just because the federal government is in a stronger position to make risky loans than the private sector does not mean that it is supposed to do so at every opportunity it gets. Practically, it is quite difficult to evaluate educational services in such a manner. Most segments of the overall educational experiences may be categorized as both investment and consumption. For example, the extra-curricular engagements could mix enjoyment as well as learning. Even when it is perfectly clear that a given college aspect will not yield future financial advantages, the students generally cannot refuse to pay up for that particular aspect and could also have no way of knowing just how much of their total tuition it stands for.

How to lower student debts

The first solution to the current student crisis is to lower college tuition fees. Student debt could be reduced if college tuition fees are reduced to manageable levels. Currently, the tuition fees are average about $21,000 for public colleges and as much as $47,000 per annum for private for profit colleges. These fees could be reduced if the government increases subsidies for college and university education.  Such subsidies could be increase if the government raises taxes. One viable way to make the idea practical is to adopt Elizabeth Warren’s tax plan. The government could tax three cents for every dollar over one billion dollars in net worth. The tax plan would impose a two percent tax on net worth that is between $50 million and one billion dollars.  Imposing such a tax would end up raising about one trillion dollars over the next decade. Such a high amount of government revenue could adequately subsidize college tuition and reduce the debt burden on current and future students

The money raised should go back into the education system including tuition. The money raised through the extra taxes could be used to lower the prices of books, pay tutors’ salaries and also fund research and other educational programs. The extra money could also be used to streamline the degree process through removal of unnecessary classes that add up to unnecessary tuition costs(Baum 50).  For those who state that the proposed solutions are impractical, the taxes levied on the top ten percent of the population would not affect the middle class in any way. Currently, the wealthy in America enjoy relatively lower taxes than the middle class. Talented and athletic students should also earn subsidies on their tuition. The government and the private sector could partner in subsidizing athletics programs to make them more affordable for students from all walks of life. Currently only a selected few students enjoy athletics scholarships which leave the vast majority of students to shoulder the astronomical costs of enrolling in such programs. Most of them do not apply for student loans for them or their children since they have the financial resources to pay their way through college. The people who are most affected by student debt are the middle class and lower middle class. It is thus not prudent to ask them to pay extra taxes to fund college education. A tax rate of three cents for every dollar over one billion is practical and would not significantly affect the incomes of the top ten percent.

Student’s debts can be reduced by subsidizing interest rates especially for private student loans. Another notable failure in the higher education market financing sector is the fact that student loans usually finance the purchases of services. The upshots that are present in the private segment will not make the student loans available on attractive agreements to as many student borrowers as the society would like to have as able to get loans for colleges.  For instance, if a student borrows $1500 dollars in her freshman year at the real market loan rate of 4.5%. The student is expected to spend at least four years in college and will probably clear the loan in the next ten years. The interest subsidy will thus save the student more than $250 of the loan or 25% of its face value (Miller 25). The federal student’s loans interests range from 4% to 7%. This is practical due to the fact that the government interventions in the higher education market as well as student loans are entirely justified on the grounds of the market failures. However, it is also the case that the government has some significant advantages when it comes to overseeing the student loans. For example, the federal government has tools that can be used to enforce repayment which the private sector does not have at its disposal. The government has the ability to take the defaulters’ tax refunds and wages. On top of that, the government is able to withstand riskier loan portfolios since, unlike the private players; it does not need to worry about eventually being run out of business.

Another solution to the student debt crisis is to adopt the ‘Pay it forward’ student lending system. This system allows students to pay no tuition fees during their studies. The students will however pay the tuition fees based on a fixed percentage of their income once they are done with college (Lee et al. 53) .This will work only if the student are allowed to pay their debts in dollars. That is the student borrowed $30,000 and is capable of offsetting the loan plus the principal in few years’ time then she will stop paying for the program. If the debtor encounters hard times after paying a certain percentage he will be given a grace period of 10 years.

Conclusion

Several factors in the area of post-secondary learning contribute to what some economists may state as a failure in the structure of the market. It therefore means that the basic conditions like the market outcomes are worse than the outcomes which may be attained with the assistance of some properly formulated policy proposals. In the absence of government interventions, very few post-secondary students would be able to enroll in universities and complete their qualifications. It would thus cut down the capacity for innovation and productivity in the economy of the nation. One notable driver of the market failure when it comes to higher education arises from the fact that there are outstanding public returns to investments when it comes to higher education.  It thus means that in case individuals and the market were left on their own devices, public investments in higher education could end up being less than optimal from the perspective of the society .More government subsidies directed to post-secondary education would make sure that students from all walks of life have access to the opportunity that is provided by higher education. It would also serve to promote higher education levels attained across the board.