Student Loan Debt: Time for Radical Reform

Richard Vedder

The American federal student financial aid system for college students is highly dysfunctional and suffers from several major defects. Two of these defects are especially fundamental.

  • The student loan program incentivizes colleges into raising tuition fees more aggressively than otherwise would be the case. Studies published by the National Bureau of Economic Research and the New York Federal Reserve Bank suggest that the largest gainer in the massive student loan expansion has been the universities themselves, not the students.[1] If tuition fees had risen after 1978 at the same rate as they rose between 1940 and 1978 (before massive federal student aid programs), they would now be about one-half the current level, and we would not have $1.3 billion in student debt and the resulting hardship for many young adults with debts of $30,000 or more.[2]
  • On balance, these programs probably deter lower-income students from attending college — the ostensible reason for having federal student aid. In 1970, 12 percent of recent graduates were from the bottom quartile of the income distribution; now only 10 percent are. By pushing up sticker prices dramatically, federal aid programs have scared some price-sensitive lower-income students from even applying for college.[3]

As the federal assistance programs led to much higher tuition fees, universities used these added revenues to finance an academic arms race that has given us million-dollar university presidents, armies of administrators who teach or research nothing, climbing walls and lazy rivers, lower faculty teaching loads to allow faculty to do increasingly trivial research, and increased subsidies for ball-throwing contests (intercollegiate athletics). Thus, collegiate productivity, though difficult to measure, is more likely falling than rising.

Massive government assistance programs have raised the demand for higher education and led to higher enrollments, yet data show that up to half of recent graduates are “underemployed,” taking relatively low-paying jobs as baristas, taxi drivers, construction workers, home health care aides, and retail sales clerks. This leads to credentials inflation (for example, requiring a college degree to be a bartender) and forces millions of young Americans into deep debt for schooling that is necessary for even some relatively low-paying jobs. Some of these students might better be trained in far lower-cost short-term vocational courses — for example, learning how to weld, drive big trucks, or work in a medical laboratory as a technician.

Moreover, the student loan programs promote academic mediocrity and falling standards. A bright student who graduates in three years through hard work gets far less federal Pell Grant or subsidized loan assistance than a marginal student who takes six years to graduate receives. Federal tolerance of poor academic performance is one reason why we see 40 percent of beginning freshmen failing to graduate within six years.

Excellence is punished. To accommodate students with ever-lower academic qualifications, schools have lowered standards dramatically. The typical grade in 1960 was a C+ or B–; now it is a B or B+. At some schools, half of the grades given are As.[4] No wonder students spend one-third less time on academics (27 hours weekly) on average than their predecessors spent 50 years ago.[5]

Radical reform of the system is badly needed. A good case can be made for phasing out federal student loans over several years. At a minimum, stricter requirements are needed. Aid, for example, could be restricted to five years for those who are seeking bachelor’s degrees. Students graduating in less than four years could be given bonuses for good performance. And colleges and universities should have to absorb some of the taxpayer costs from unusually high rates of student loan default.

Lending to students ideally should become a private responsibility. New privately provided financing arrangements, such as income share agreements, should be encouraged. They end taxpayer responsibility for financing college and shift risks from the student to the private investor. The recent trend toward promoting federal student loan forgiveness and favoring public-sector employment should be reversed. It treats (poorly) the symptoms, not the disease.

Finally, why not take advantage of the potential for experimentation in our federal system by turning more of the responsibility for financing college back to the states and the private sector? States could use block grants, for example, to promote educational access at all levels — primary, secondary, vocational education, and higher education — rather than having to conform to a one-size-fits-all policy determined in Washington.

Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

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Employment-Population Ratio


  1. Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” National Bureau of Economic Research Working Paper No. 17827, February 2012, (accessed June 2, 2016); David O. Lucca, Taylor Nadauld, and Karen Shen, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” Federal Reserve Bank of New York Staff Report No. 733, July 2015, revised March 2016, (accessed May 26, 2016).
  2. Richard K. Vedder, “The Rising Cost of College: Lowering It Will Provide Young People with One Less Obstacle to Overcome in Life,” The Ripon Forum, Vol. 50, No. 2 (April 2016),
     (accessed May 26, 2016).
  3. Allysia Finley, “Richard Vedder: The Real Reason College Costs So Much,” The Wall Street Journal, August 26, 2013, (accessed May 26, 2016).
  4. Catherine Rampell, “A History of College Grade Inflation,” The New York Times, July 14, 2011, (accessed May 26, 2016).
  5. Philip S. Babcock and Mindy Marks, “The Falling Time Cost of College: Evidence from Half a Century of Time Use Data,” National Bureau of Economic Research Working Paper No. 15954, April 2010,
     (accessed May 26, 2016).

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