One Really Bad Way to Overhaul the Student Loan Market

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Jonathan Glater, a visiting assistant professor of law at the University of California, Irvine, and a former reporter at the New York Times, has published a paper called The Other Big Test: Why Congress Should Allow College Students to Borrow More Through Federal Aid Programs.

His basic proposal is this: Federal student loans offer better terms and repayment options than the highly toxic, variable rate private student loans, and so therefore the government should allow college students to borrow up to the full cost of attendance using federal loans.

The first part is true, and the second part is insane. With section titles like “Borrowing More Can Be Good” and “Learning to Love Debt,” there’s a lot of things about this proposal to dislike.

(MORE: Demand for Student Loans Increase)

But my least favorite part of the plan is this: Increasing federal student loan limits will encourage students to borrow more money, because there is a perception that it’s more conservative to borrow through the federal government: “Why would Uncle Sam stick me with too much debt? It must be OK!”

Mark Kantrowitz, a leading student loan expert and founder of, agrees with me.

“Students often treat loan limits as targets, so it is likely that this will lead to undergraduate students borrowing more than they need,” Mr. Kantrowitz said in an email. “It would also lead to students enrolling at colleges they can’t really afford, since they could borrow without restraint up to the full college costs. That will make it more difficult for them to repay the debt, since the debt will be out of sync with incomes. Income-based repayment does provide a safety net, but one should not need to routinely rely on such a safety net for more than a few percent of the student population. The risk with the colleges is not that they would increase tuition more than they already do given an unlimited source of liquidity, but rather that they would substitute the loans for institutional grants, reducing the amount and proportion of gift aid in the financial aid package. That would yield a significant real increase in the bottom line cost of college.”

(MORE: What to do When Your Adult Kids Are Terrible With Money)

Glater’s proposal relies heavily on the idea that the forgiveness programs on student loans really make these programs more like grants, and that they could be marketed that way. Kantrowitz called that idea a “misleading” marketing tactic that would be “ultimately very harmful.”

The solution to the college cost crisis is to increase grant aid, get serious about cutting the cost structures at public colleges, and for students and families to do everything they can to pay cash for college. Raising the federal student loan limits should not even be part of the discussion.