Unlike most loans, there is no collateral associated with federal student loans and no co-signers. Often the person seeking the loan is a teenager with little or no experience with taking on substantial debt. In the case of default, collection is problematic and nothing may ever be recovered. When a federal loan isn’t repaid, the taxpayer pays. This is clearly not a good situation and needs to be addressed. The fallacy is that some loan applicants do not seem to even consider the employability or salary of graduates in their chosen target occupation relative to prepaying the loan. It’s reasonable to assume many teenagers do not fully understand the significant obligation they are undertaking or how to evaluate if it makes economic sense.
While it may be understandable that a person can have a strong interest in a particular profession, if it’s not economically viable to pursue based on using a loan, they need consider other professions. It just doesn’t make any economic sense to fund known loosing endeavors. A viable, well paid occupational goal is in fact the only collateral for these loans. So the problem occurs when a person selects a program of study, such as a university major, that either has very low or no reasonable prospect for employment after graduation and/or has a salary below that which would allow for loan repayment.
The solution is to only permit federal student loans for study programs that hold both the potential for likely employment upon graduation and a salary that will clearly provide adequate funds for loan repayment within a reasonable time. The Department of Labor can provide the employment outlook and average salary for occupations associated with each particular study program.
A significant factor is the cost of an educational program which can vary widely between institutions. At times a student selects an educational institution with higher than average costs that can result in very substantial loan debt, disproportionate to the salary for the profession. In an event, a graduate’s salary has to reflect the ability for repayment of the debt incurred relative to the institution selected. It can easily be a situation where the cost of the education far exceeds the return (salary) on that investment. So, the educational institution would need to publish the full cost (validated) of completing their study programs as part of the decision process. Using all this data, a loan officer could make a decision on granting federal student loans using common sense economic criteria.
While this approach would clearly reduce or possibly eliminate some educational programs, do we really need people educated in a low/no demand occupation, paying far more for an education than justified based on an occupation’s salary? The criteria for issuing federal student loans need to include the economics of granting a federal loan, similar to private lenders.