Beyond Student Loans

Student loans regularly grab headlines, but loans are typically a small part of financing a college education.  Personal and family contributions, federal grants and subsidies are actually a bigger part of the total outlay.  College students and their families have been borrowing and repaying for almost a lifetime. Today’s hideous $1.2 trillion total of student debt has been accumulating since the National Defense Education Act of 1958. In times of a tight federal budget, grants and subsidies become legitimate targets for cost savings. The prominent candidates for savings would make a small change in the student’s cost of attending college.

In the period between 2004 and 2014, annual costs for undergraduate education increased from $25,000 to $45,000 for private institutions. Over the same period, “in-state resident” tuition at public institutions rose from $10,000 to $20,000. The overall average for tuition and living expenses in 2015 was $36,564 for the 20.2 million students in higher education during 2012.  Four years at college cost about $146,000 and the average student borrower leaves school with about $30,000 in loans.  The other $116,000 (or $50,000 for in-state public colleges) must come from personal and family contributions plus federal grants and subsidies.

Only the very poorest students and families qualify for Pell grants of up to $6,100 per year.  The American Opportunity Tax Credit (AOTC) provides $2,500 of tax credit for each of four years for any eligible student. The Lifetime Learning Credit (LLC) provides a tax credit of 20% of tuition expenses to a maximum of $2,000 in credits.  Currently, interest subsidies for student loans are available to all student borrowers for short periods of time.  Thus, most students can count on about $18,000 in federal tax credits over 4 years in college.  That leaves a balance of personal and family contributions totaling $32,000 for a public university or $98,000 for a private university.

That investment requires careful soul searching into which major will satisfy the student’s immediate personal interests and the student’s need for adequate income in the long run.  Some colleges and programs will prove to be wise choices, and some will be disappointing.  Once a student begins borrowing, it is import to push forward to graduation.  The income difference between graduates and those who fail to graduate is almost double, and a doubled income can repay loans with less effort.

Student loans are not automatic – they are the consequence of tuition and living expenses at the school chosen and the way the student chooses to finance that investment. Student loans, once accepted, must be repaid and they cannot be discharged in bankruptcy court.

The Congressional Budget Office (CBO) researched a hundred proposals for reducing federal outlays or increasing federal revenues – just in case the Congress and President want to balance the budget.  Three proposals related to grants and subsidies for college students would not hobble needy students.  Over a six-year period, they estimated savings of $168 billion were possible, or $28 billion per year.

The CBO monetized elimination of the AOTC and LLC, as well as voiding the reinstatement of the HOPE tax credit scheduled for 2018, and eliminated the deductibility of interest expenses for student loans.  These four measures would raise federal revenues by $92 billion over the period 2017 through 2023.

Currently, no interest is charged on student loans when student borrowers are enrolled at least half-time, or during the six months after they leave school or drop below half-time status, and during certain other periods when borrowers may defer making payments.  The CBO evaluated a proposal to restrict access to these loan interest subsidies to students who would qualify for Pell grants.  Other students could still qualify for loans, but would not be entitled to an interest subsidy.  The proposal would lower federal outlays by $14.2 billion over the period 2017 through 2023.

Another proposal that CBO evaluated was to eliminate the Pell grants “add on” that is funded with mandatory spending.  Annual Pell awards are based on a maximum grant of $4,860 set in appropriations and an “add-on” based on mandatory funding – inflation indexed during 2017 to 2018 – but then $1,240 thereafter for a total grant of about $6,100.  If the mandatory spending amount were removed, federal outlays would decrease by $61.7 billion over the period 2017 through 2023.

The average of $36,564 for each of the 20.2 million students in higher education results in a $739 billion annual outlay for college.  In times of severe budget stress, a $28 billion reduction in federal grants and subsidies to college students would be $3.8% of the outlay, and would reduce per-student subsidies by $1,386, largely through the federal tax mechanism.

Even in times calling for austerity, some will denounce any reduction in entitlements.  The CBO proposals were shaped to protect those who could least afford cutbacks.  When $28 billion is desperately needed for other programs, a 3.8% reduction in federal largesse can be accommodated through wiser choice of school and program and by committing to graduate on time.  Almost all the angst can be avoided by graduating, since graduates have a much easier time handling student loan obligations.

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