Privatizations of Large Lending Agencies by the Government Would Decrease Student Debt
Privatizationsof Large Lending Agencies by the Government Would Decrease StudentDebt
Itis the expectation of everyone that when a student graduates fromcollege, they immediately get to apply the information they havegained in the institutions in the corporate world. Nevertheless, morestudents are facing high-value debts problems than in the past, andthere are those who are unable to clear the debts entirely. Suchsituations have led to the rise in debts and unavailability of fundsfor potential borrowers. In addition, the lack of money has beenassociated with poor collection machinery, which fails tosufficiently determine money used to collect overdue loans and thevalue of servicing the loans. More so, limited government funding andinflation have been described as major causes of the rise in thevalue of the student debts (Dervarics,40).Most students do not have sufficient knowledge regarding the interestrates associated with the loans. Therefore, they try to abscond whenthey discover the massive debts that they are supposed to pay afterthey have graduated (Ross,27).Although various policies have been implemented, the government willmore adequately address the issue by restoring private-sectorparticipation in student financing. This article will exhaustivelyoutline the student funding problem and recommend privatization asthe best solution.
Revisionof assignment 2
Manyyoung adults are barely contributing to the economy since they spendmost of their earnings on payment of student loans. Graduates haveenslaved themselves as the means through which they can pay off thedebts are becoming more limited. About 70% of undergraduate studentstake loans from either the government or private firms (Burawoy,33).Student loan debt is now a crisis as analysts are even compelled tocompare the former to risky mortgages. These high debt values couldbe attributed to low family income. The cost of acquiring collegeeducation is increasing, and thus, students have to apply for theloans since most families are not in the financial position to paythe tuition fees. Information that most students have regarding theloans is insufficient. Lack of information is risky since both theparents and students do not know the consequences of borrowing untilthey are informed about their balances. There are cases ofindividuals who have to do two or more jobs to be able to pay offtheir debts. Although this article will be mainly involved withshowing that privatization is the key to reduced student debts, it isimportant to note that some rules need to be set before such actionis taken. It is the responsibility of legislators to make sureprivatized firms do not abuse the citizens especially when it comesto student loans. Lawmakers failed when they allowed theprivatization of Sallie Mae. The firm changed to a profit-orientedone, and thus it imposed higher interest rates on the student loans.Sally Mae made a profit of around $3.5 billion in 2013 while thenumber of students who could not pay off their loans increased. Thegovernment has also failed by initiating budget cuts that lead tohigher college education costs. More so, its investment in highereducation is questionable. High-value students` loan debts havepartially resulted from the government`s poor investment strategiesin the education sector. To develop a solution to loan-relatedproblems, the government should put in place measures to createawareness of the consequences of the loans. A parent should alsostart saving even when their kids as early as possible. Therefore,they will be able to take their children colleges when the timecomes.
Consequencesof Borrowing
Borrowingaffects career choices.Astudy carried out in 2013 by the American Student Assistance hasshown that around 30% of students believe that debts played asignificant role in their career choices. Consequences of the studentdebts such as falling to default drive students away from public jobsthat provide low income. The finding clearly shows that students whoborrow have a different perspective of their career opportunitiesfrom those of non-borrowers. As a result, their career planning isdistorted. In the long run, the selection has an adverse effect onthe country`s economy. In addition to career decisions, it is clearthat the loans provide the borrowers with and implanted process ofthinking that delivers the message that the students should wait tostart their social lives. After marriage, the graduates who stillhave outstanding debts are less likely to be satisfied than those whohave cleared their debt balances or did not apply for the loans whilein college. More so, the results from the study conducted by AmericanStudent Assistance show that 43% of the borrowers have delayed havingchildren.
Itis evident that more individuals in the 18-39 age bracket, and whostill have outstanding student loan debts are not satisfied withtheir financial positions as compared to those in the same agebracket, but who do not have outstanding debts. More so, it is lesslikely to for the borrowers who still have outstanding debts toperceive a payoff immediately as a result of going to college whenthe same comparison is made. Financial stress due to outstanding loanbalances would serve as evidence for inappropriate debt collectionapproaches and insufficient agencies that are involved in thecompilation of the excesses. Students are penalized when they fail topay on time, and they get frustrated when trying to manage the debts.While peer and media attention may increase the stress among theborrowers, it is important to note that the stress is primarilyassociated with economic challenges the borrowers face due to thedebts.
Muchattention and funding have been directed towards delinquencies anddefault problems. Loans are rendered delinquent when students delaymaking payments within 60 to 120 days. While cases of delays inpayment are common in the country, it is evident that it is difficultto service the student loan product successfully due to the contextin which it is situated. Currently, the rate of debt delinquency ofthese loans is higher than other debt products such as mortgages.Some borrowers and lenders have utilized some approaches in attemptsto cope with the difficulties associated with repayment of theseloans. However, some of the methods have led to adverse effects suchas ‘deepening` of the loans. For example, around 21% of studentborrowers try to prevent the occurrence of delinquency by temporarilysuspending of the loan payments (deferment) or reduction of thepayments for a short period due to financial problems (Saltman,41).Although such arrangements may allow the students to avoid thepayment trouble for some time by stretching out the indebtednessperiod, the actions act as a hindrance to capital development. Thereis also a rise in the number of defaults. Defaulting occurs unevenlydue to income disparities. Students from well-to-do families are lesslikely to default as compared to those from low-income households.
Studentloan debts also affect asset accumulation. Studies show that studentswho graduate with outstanding debt balances are characterized withless retirement saving. In addition, most of them delay purchasingassets such as homes when they are still young. In the long run, theoutcome of such includes wealth inequalities among graduates duringtheir later lives.
Failuresof the United States Department of Education Regarding Student Loans
Theassets of the Education Department of the United States of Americaare large enough to make it be ranked among some of the biggestagencies in the country in terms finance. However, the departmentlacks sufficient infrastructure to manage the assets effectively(Kelly, 17). In 2013, the department received around $757 billionthrough loans, fees and interest due to the student loans. Based onfinancial reports from banks, only six of them had more assets thanthe department. Kathleen Tighe, the section`s Inspector General, saidthat there was a need for proper management due the extensiveportfolio of the department. Insufficient administration of theagency has contributed majorly to the high student loans.
Currently,the department has more than 40 million people who are in debt to it.The number increases annually, and more than 71% of students whograduated in 2012 had borrowed. Putting up measures to improve theaffordability of higher learning institutions and helping thestudents to reduce their debts are not part of the department`smission. The Education Department has not mentioned on its website,solutions for students who struggle to pay off the debts. More so,more students are going to default with the highest number recordedin 2012. Research carried out by the study showed that many of thebanks it had signed contracts with were not compliant with customerservice yet it has not taken any action. Moreover, the departmentsent a letter to Senator Elizabeth Warren and accused Sallie Mae, oneof its biggest partners, of having accounting errors and had failedto pay its $22.3 debt.
Reductionof Student Loans Debts by Privatization
Beforethe existing loan system where the federal government provides loansto students directly, a free market that would finance highereducation did not exist. As an alternative, the government guaranteedloans that were offered by institutions from the private sector. Moreso, it limited the interest rates and the maximum amount that couldbe borrowed. The period of ‘private` student loans lacked the mainbenefits that emanate from privatization. Citizens bore the fullrisk, and so banks lacked an incentive to get rid of poor qualitycolleges. Fixed interest rates did not create room for price-basedcompletion. These drawbacks of are also part of the student loanstructure, but they are not unique to it.
Restoringthe system would not change much. It is essential to keep in mindthat privatization could only work in the presence of stateguarantees. Critics of privatization insist that implementation ofthe private student lending will lead to failures in theinsurmountable market. However, they base their argument on thenotion that students loans will not be secured. In addition, thecritics assert that the interest rates will be increased and morestudents will be discouraged to take the loans.
Supportersof privatization have responded to the claims by saying that thesolution to such a problem is to put up student equities. Under sucharrangements, lenders would pay fees for the student provided theyreceived some percentage of their income in future. The existence ofa variation in the value of the graduates` revenue, the lenders willdiversify the risk by ensuring that those receiving higher income paymore to cover the losses that the banks incur as a result of thelow-income earners` failure to clear off their debts. In summary,this will solve the problem of low-level investment.
Currently,the idea has been developed into the Income Share Agreement. However,Professor Susan Dynarski of the University of Michigan claims that itwould be difficult for the plan to work since it would be difficultfor the private sector to track the income of the ISA recipients. Ibelieve that would not be a problem for ISA lenders. Just likemortgage lenders, they have the ability to obtain informationregarding submission of tax returns from the IRS.
Morecritics have questioned the viability of the agreement due to lack ofregulatory clarity. According to them, it is not clear whether ISAswould possibly be discharged in insolvency, whether they would besubjected to lending rules and the criteria that would be used to taxthem. It is also uncertain through which agency would they beregulated. Regulators will have to come up with solutions that willpresent ISAs as a safe monitoring structure under which investorswould operate. There is also the big federal student loan program.The US government offered loans to borrowers at a $21 billion loss in2016 according to information from the Congressional Budget Office.The combination of the loss and the idea that higher learninginstitutions encourage the borrowers to utilize federal loans beforeconsidering the private sector would not motivate the private firmsto get involved in the same. However, these the barriers representpolicy and not market failure.
Thecurrent student loan system has induced high tuition fees and imposeda burden on the taxpayers. Privatization would lead to the creationof a free market in the student loans that would bring together theinterests of the borrowers and the lenders to make sure student debtsare reduced (Cooper, 2). Skeptics of privatization should rememberthat private ISAs can exist together with government loans. It willnot necessarily mean that there will be an abolishment of the statestudent aid. The primary objective will be to limit the federalfunding at a realistic level, to enable the ISAs to cover up for theremainder of the tuition costs. In the long run, the arrangementwould reduce the student debt significantly.
Inconclusion, privatization needs to be implemented to reduce studentdebts in the country. The department of education has also failed insolving problems related to student loans. Huge outstanding balancesare acting as a hindrance to the economic participation of youngadults. Privatization should be used cap the federal aid and allowISA lenders to cover up for the remaining losses.
WorksCited
Burawoy,Michael. "Facing an unequal world." CurrentSociology63.1 (2015).
Chronicleof Higher Education,vol. 60, no. 27, 21 Mar. 2014, accessed formhttp://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=94983398&site=ehost-live&scope=site.
Cooper,Preston. StudentLoans Need Real Privatization. 2016. Accessedfromhttps://www.forbes.com/sites/prestoncooper2/2016/07/22/student-loans-need-real-privatization/#4ebc0b34520b
Dervarics,Charles. “SomeAdvocates Want Long-Term Student Debt Solutions.” DiverseIssues in Higher Education, Vol.29, No. 9, 07 June, 2012. Accessed fromhttps://www.questia.com/magazine/1G1-294505922/some-advocates-want-long-term-student-debt-solutions
Field,Kelly. "Problems Are Said to Linger in Student-LoanDebt-Management System."
Ross,Andrew. Creditocracy:and the case for debt refusal.OR Books, 2014.
Saltman,Kenneth J. "The austerity school: Grit, character, and theprivatization of public education." symploke22.1 (2014).
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