Abolish Federal Student Loans

When it was created in 1965, the federal student loan program was pitched as a way to make college accessible for Americans who couldn’t afford to pay tuition out of pocket. The program would supposedly rocket millions into the middle class by helping them obtain college degrees.

Instead, easily accessible loans led to skyrocketing tuition—and gave schools an incentive to create low-value programs accepting students unlikely to graduate, all to absorb government money.

At this point, there are more than $1.6 trillion in outstanding federal loans. The Biden administration has turned to student loan forgiveness to solve the problem, but that’s an ineffective Band-Aid for this giant hemorrhage—one that gives colleges no reason to lower their prices or stop exploiting high-risk students.

There’s a better solution: Abolish the federal student loan program altogether.

The idea isn’t as radical as it may seem at first. A world without federal student loans can, and should, be a world where students can go to college, even if they can’t afford to pay out of pocket.

Most obviously, private operations would almost certainly swoop in to provide loans. This isn’t much of a stretch, considering they already provide around 8 percent of current student loans. Other alternatives, such as income-sharing agreements, could help students pay for college without relying on taxpayers.

Ditching federally funded loans won’t just benefit taxpayers; it will change incentives in ways that benefit the students who rely on loans to attend college. Most people burned by huge student loan balances got there because they either didn’t graduate or enrolled in a low-value program. Frequently, these are graduate borrowers, who (unlike undergrads) face no cap on the amount of federal money they can legally borrow.

The current program lets students use public money to enroll in programs with very low financial value. According to American Enterprise Institute education researcher Preston Cooper, around a third of degree programs have a negative return on investment (ROI)—that is, they cost more than any increased earnings that students should expect from their studies. Unlike the government, private loan servicers have a clear incentive to get back the money they give to prospective students. That means it will be harder to get loans for a low-value degree, and easier to get them for programs with a significant return on investment. In the end, this will make it harder for students to make unwittingly disastrous financial investments.

There’s no reason to think such a scheme would mean the end of arts or humanities degrees. Lots of majors with a reputation for being “useless” actually have a positive return on investment, depending on the university. In all, Cooper found that 77 percent of bachelor’s degrees have a positive ROI, while just 57 percent of master’s degrees do. Furthermore, adding this extra friction to accessing student loans would put downward pressure on college tuition, especially for graduate programs.

Ditching the federal student loan program wouldn’t mean that only rich kids can go to college. But it would mean that fewer students enroll in sketchy colleges or extraneous graduate programs and end up with mountains of taxpayer-funded debt.

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