Economic Impact of Privatizing the Student Loan Marketplace

In the past, most attempts to trim the economic fat from the federal budget have failed. Generally, federal spending continues to rise year over year and our national debt increases alongside it. As interest groups promote their favorite government programs and entitlements, national spending has increased regardless of demonstrable benefits. However, the Trump Administration has implemented several initiatives aimed at reduction of the size and scope of government, including an executive order mandating the elimination of two federal regulations for every new one created. Could it be that the privatization of student loans, a practice that has been advocated by economists for years as a viable salve to the nation’s student loan debt crisis, might finally be realized?
 
Privatization returns student loan lending and servicing from the province of government agencies to that of private lenders such as banks and credit unions. These private institutions, who are generally more discerning in their lending habits than the Federal Government, and additionally more in touch with economic reality, are more than willing to step into the government’s shoes as lender. However, what the U.S. needs is not simply a return to the pre-2010 days of private lenders making federally guaranteed loans. In order to revitalize the economy and combat the rising tide of crushing student loan debt, we need a new, cleaner privatization of student loans. We need true, free-market privatization.
 
Before the current system of federally made student loans was in place, the federal government still tinkered in the student loan marketplace. It did so by guaranteeing student loans made by private lenders. At first glance it seems innocuous enough, but what this setup really meant was that the government expected preapproved private lenders to make loans while the government set borrowing limits and interest rates. This system lacked the most potent benefits of full privatization. In the old system, taxpayers still funded student loans through subsidized interest rates and fee limits, instead of relying upon a true, free market to dictate loan terms. Taxpayers bore the risk, through the Federal Government, and so private lenders took virtually any and all applicants. Thus, market interest rates had wide variation. The student loan debt crisis was not created overnight, nor has it developed since 2010. It was born of the very system that the Republican Party advocates a return to. If we want to right the capsized boat that is our student loan problem in the U.S., we need privatization in more than name. We need privatization in practice, as well.
 
Unfortunately, the current federally backed system has been a failure of epic proportions. Not only has it resulted in exponential tuition increases at both private and state colleges, but it has forced taxpayers to fund student loan default at a rate that currently exceeds 11% of borrowers. It also resulted in the proliferation of unscrupulous colleges and trade schools, all of which absorb massive amounts of federal funds, and many of which—such as ITT Tech and Corinthian—have shuttered their doors after being plagued for years with complaints of low job placement rates. A free market for student loans would force private lenders and students to come together in their goals. When students succeed, so do lenders and their investors. In the current system, only the government stands to profit off of student loans, and it often does so at the expense of students and taxpayers.
 
The potential effect of privatization on the U.S. economy is significant. For starters, total amounts borrowed each year would decrease drastically. Private lenders would not offer virtually unlimited borrowing and college tuition rates would see a nosedive to conform with the new reality of how much money students can afford to pay. Between 2000 and 2013, college tuition rose an average of nearly 87%, for no discernable reason other than that students were able to pay higher tuition thanks to guaranteed federal student loans.
 
In essence, privatization forces schools to behave in economically feasible ways, which are inconsistent with current tuition hikes. And tuition hikes have been the number one cause of increased educational costs. As student borrowing decreases, money that graduates have had to spend on student loan payments will be freed up to enter other areas of the economy, such as housing, which has seen decreased activity from younger generations that are saddled with the kind of student loan debt unknown to their parents’ generation.
 
The economic impact of privatizing the student loan market is unquestionably a return to stability and market feasibility and an idea whose time has come. The question is, how soon can it happen?