Are student loans hurting not helping students?

• Author: Flanagan, Devon

1. INTRODUCTION

   In the United States, an estimated thirty-nine million citizens have federal student loans. (1) Despite the numerous repayment options offered by the U.S. government, as of June 2013, close to one trillion dollars of federal student loans remain unpaid. (2) Simultaneously, England and Japan have students acquiring significant amounts of student debt, raising the question of how student loans affect a country's economy. (3) The governments in these countries, however, have yet to encounter a comparable financial crisis on government-funded student loans. (4) These statistical findings raise numerous questions; among them, why do American students have such difficulty repaying their loans? (5)

   This Note will compare the emerging student loan default crisis in the United States with the practices and structures of government-issued student loans in comparable countries. (6) Part II of this Note will examine the history of the student loans in the United States, Germany, England, and Japan. (7) Part III of this Note will highlight the aggregate effect that student loans have on the United States economy, in comparison with the economic effects of student loans in Germany, England, and Japan. (8) In Part IV, this Note will suggest specific areas of reform in the United States' federal student loan program. (9) Finally, Part V of this Note will conclude that the advantages of changes to the current student loan structure offer students of the United States significant opportunity to recover from their student debt. (10)

2. HISTORY

   1. The History of Student Loans in the United States

      U.S. citizens often believe that attending college affords them the best opportunity to attain a successful career, and with more than seven thousand universities in the United States many find that a dream easy to achieve. (11) In 1840, Harvard University created the first student loan program, more than twenty years before the United States Department of Education was founded. (12) Originally, there were two major types of loans: direct loans and guaranteed loans. (13) The Guaranteed Student Loan program would later become the Federal Stafford Loan Program. (14) Major additions to the U.S. student loan structure followed, including the Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program (Ford). (15) These modifications to the student loan programs were not just an alteration for the student borrowers but also for the federal government, as they included major budgetary adjustments for Congress. (16)

      In 2010 Congress passed and President Obama signed into effect a bill eradicating the FFELP program; the bill mandated that all student loans be given under the direct loan program. (17) The implementation of this modification to student loans was accomplished through the enactment of the Health Care and Education Reconciliation Act, which contained the Student Aid and Fiscal Responsibility Act. (18) Currently, the federal government provides four types of student loans: Subsidized Stafford, Unsubsidized Stafford, Parent Loan for Undergraduate Student loans, and consolidation loans. (19) In addition to loans that the federal government provides, a student can also obtain student loans through a private lender. (20) Student loans serve two main functions: creating equal opportunities for students from all financial backgrounds to attend a higher education institution of their choice, and providing a momentous source of revenue for the federal government. (21) The staggering number of students who graduate with debilitating amounts of student loan debt, contrasted with the significant amount of revenue student loans generate for the federal government, presents the issue of whether the federal government is enabling colleges and universities to continuously increase tuition. (22)

   2. The Current United States Module for Student Loan Repayment

      An American's choice to attend college is often motivated by the presumption that possessing a college degree will substantially increase his or her earning potential; however, that presumption is called into serious question when students face a highly competitive job market in addition to owing a large amount of student debt. (23) Two years ago, the graduating class of 2014 graduated with a new category of honors: being the most indebted class that the United States has ever seen. (24) When the federal government furnishes student loans, the borrowers are encouraged to utilize services such as the "repayment estimator" to get an understanding of the amount of debt they are accruing and the differences among the seven types of repayment options available. (25) A borrower must keep in mind the unique characteristics of each repayment option when selecting a repayment method; for example, crucial determinations are often the amount of interest he or she will be required to pay and whether his or her type of loan allows for a specific repayment plan he or she intends on utilizing. (26)

   3. Student Loan Procedures Within International Higher Education Structures

      1. Higher Education in Germany

         There are an estimated 379 public higher education institutions in Germany, with a very small percentage of private institutions enrolling less than 5% of the total number of students. (27) From 2006 to 2007, seven of the ten German states introduced tuition fees for higher education institutions, along with affordable student loans. (28) By October 1, 2014, however, all seven of those German states had successfully abolished the tuition fees. (29) A German senator explained this decision: "Tuition fees are unjust ... [t]hey discourage young people who do not have a traditional academic family background from taking up study." (30) "It is a core task of politics to ensure that young women and men can study with a high quality of standard free of charge in Germany." (31)

         Historically, of the estimated 2.4 million students who attend higher education institutions, less than 1 million of them have student loans. (32) The Bundesaubildungsforderungsgesetz (BAfoG) is Germany's Federal Training Assistance Act that distributes monthly assistance, in the form of loans and grants, to students pursuing their talents and interests in a higher education institution. (33) As a general rule, a student receives an amount that is determined according to his or her basic needs, including general expenses and training costs. (34) BAfoG continues to be a working act, demonstrated most recently by the Twenty-Third Amendment of the Act, which aimed to increase the number of people eligible for funding, while also raising the amount given. (35)

      2. Higher Education in England

         In England, the Royal Charter or legislation first established higher education institutions when it became a self-governing, independent entity, focusing on teaching and researching. (36) Higher education institutions include universities and university colleges, in addition to publicly designated and independent institutions. (37) In 2011, the United Kingdom presented a funding mechanism to allow England to increase tuition prices while reducing the amount paid in grants to institutions through funding councils, which increased tuition prices on average 2%, close to the maximum that an institution can charge. (38)

         Despite the recent increase in tuition fees, the Universities Minister, David Willetts, believes, "No one should be put off going to university for financial reasons. Our reforms do not have to pay fees upfront, there is more financial support for those from poorer families and everyone faces lower loan repayments once they are in well-paid jobs." (39) A Student Loan Company (SLC) facilitates many of these loan options, which is a nonprofit government organization that provides both loans and grants to students pursuing a higher education. (40) Repayment of student loans is the borrower's responsibility working in conjunction with SLC and Her Majesty's Revenue & Customs. (41) It is anticipated that students could owe the British government more than GBP330 billion by 2044. (42)

      3. Higher Education in Japan

         The Japanese Constitution provides that every citizen shall be entitled to equal opportunities to receive education in accordance with the laws; additionally, the Fundamental Law of Education affords that the independence, autonomy, and the merits of education shall be respected. (43) The three categories of universities in Japan are: national universities, public universities, and private universities--all of which award bachelors, masters, doctorates, and other professional degrees. (44) The average annual tuition for public tertiary education at private universities in Japan is between JPY540,000 (USD5,700) and JPY860,000 (USD9,000) and only 40% of students receive public loans or scholarships for attending higher education. (45)

         From 2001 to 2011, the number of Japanese students taking out student loans increased by 70%, reaching a total of 1.29 million. (46) Unfortunately, the recent recession has caused more than 60% of recent graduates to remain unemployed and unable to repay their student loans. (47) The Japan Student Services Organization (JASSO) an organization founded in 2004 provides the majority of students with scholarship and support programs. (48) JASSO provides loans to academically successful students who have difficulty paying for their studies, while also serving as an organization that eliminates students' financials concerns. (49) There are two types of loans that JASSO furnishes: Category One loans, which are interest-free loans, and Category Two loans, which are interest-bearing loans. (50) A large percentage of funding for this student loan program originates from graduates repaying their student loans, therefore holding these student borrowers to a heightened level of responsibility. (51)

3. WHAT IS THE AGGREGATE EFFECT OF STUDENT LOANS ON AN ECONOMY?

   1. The...