Student Loans, Redux

by Jonathan Robe

The other day Sandy Baum and Michael McPherson, over at the Chronicle's "Innovations" blog, had this to say:

Students have little understanding of the difference between subsidized and unsubsidized loans (or, unfortunately, of the difference between federal and private loans). What they do understand is their payments once they leave school.

This quote isn't wholly dissimilar to a point I attempted to make around three weeks ago when I was bemoaning the classification of student loans as a type of "financial aid"(though Edububble does a better job than I at articulating it). Here's what I said then:

it is the Department of Education itself which classifies student loans, along with grants and work-study, as “aid.” But there is a fundamental distinction between grants (which don’t have to be repaid) and loans (which do, with interest). Of course, because some of the loans are subsidized by taxpayers (by delayed repayment, below-market interest rates, etc.), classifying these loans as “aid” is not a complete lie. It is, however, deeply misleading to students by giving them an incorrect picture of the true cost of their college education... the ED isn’t doing that much to help by continuing the mis-characterization of the nature of student loans.

Baum and McPherson seem to provide a corroboration to my point that the federal financial aid system is something of a mess, both confounding students with its complexity as well as fostering an atmosphere where students are misled about the true costs their education incurs. Of course, part of the challenge we face isn't only correctly identifying the problem with the current financial aid structure; we must articulate the right solutions as well. I am skeptical that pumping more subsidies (even if they are supposedly better targeted) is the proper course to take. Rather, we need more fundamental reform in higher ed where both schools and students are more sensitive and responsive to true costs. That is, I think, the key to ensuring that college is affordable.