"President Trump’s proposed budget was underwhelming when it came to reforming the federal role in higher education. But in one area it was right on the mark: its proposal to eliminate subsidized student loans. While sold as a progressive policy, subsidized loans are anything but," Preston Cooper writes in an opinion piece for Forbes.
"The federal government’s Stafford loan program gives undergraduate students access to two types of loans: “subsidized” and “unsubsidized.” Trump’s budget abolishes the former; students would still be eligible for the same dollar amount of loans, but all would be unsubsidized. This change would save taxpayers nearly $40 billion over a decade, per Education Department estimates.
Subsidized loans provide extra benefits to students from low-income families, but make no distinction between students who earn different incomes after college. A team of economists led by Raj Chetty recently published research showing that students from low- and high-income families who attend the same college have similar earnings prospects after graduation. But since eligibility for subsidized loans is based on income before college, two individuals with the same income after college may end up paying different amounts. That’s hardly equitable.
The notion that we should care more about a poor student who becomes rich than a rich student who becomes poor is an odd one, but it’s central to the idea of subsidized loans.
Consider two students, Rosencrantz and Guildenstern, who attend the same college. Each borrows $27,000 from the federal government. However, Rosencrantz comes from a lower-income family and thus uses mostly subsidized loans, while Guildenstern’s loans are all unsubsidized. After graduation, both enter the same field and earn the same income. They both enroll in the standard, 10-year loan repayment plan. Despite enjoying identical education and identical careers, Rosencrantz’s subsidized loans mean he will repay $2,300 less than Guildenstern."
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Publication Date: 6/5/2017