Federal Student Aid

Federal Student Aid

Student aid programs at the federal level are critical for learners seeking financial assistance. The learners may hail from both well-off and poor backgrounds. For those in low-income families, the student aid helps them pursue post-secondary education that would be otherwise unachievable. For those in well-off families, student loans help them pursue education in more expensive institutions than their families could afford. In addition, they also have the chance to save their family’s resources for other uses. However, these programs are challenging to manage efficiently due to the lack of equity. Besides the inequitable distribution of financial resources, learners also have immense difficulty repaying the loans due to a lack of stable incomes. In addition, the increased number of Americans pursuing post-secondary education has also led to higher debt for each household. The default rate depicts a widespread challenge for learners who have benefitted from the financial student aid programs, which calls for a review of the current repayment plans to reduce the default rate.

History of the Problem

In the past, more than forty million Americans have benefitted from student aid programs. The debt rounds off to approximately $1 trillion. After mortgages, student loans are ranked second as the most difficult to pay off. The debt crisis does not cause a lack of repayment. Instead, the repayment crisis is caused by the absence of the ability and motivation to pay the debts (Dynarski, 2014). Recently, student loans have become the primary mechanism of financing post-secondary education. In the past, federal, state, and private grants were the primary financial resources for post-secondary education until 1982. During this year, the student loans started to outdo the grants. By 2000, student loans catered for up to 38 percent of boarding, tuition, fees, and room. By 2013, student loans catered for up to 50 percent of the same elements (Elliot, 2014).

As a result, student loans continue to plague most families, especially those in poverty-stricken homes. At least 40 percent of all individuals’ households under the age of 35 years have an unpaid student loan. The borrowing continues to increase as more undergraduate students access more loans. Between 2001 and 2012, the proportion of students who took out federal student loans increased from 23 to 35 percent. This resulted in debts of at least $113.4 billion by 2012, 24 percent higher than five years ago. This situation affects the financial security of Americans and their households. True to this aspect, the Federal Reserve Bank of New York stated that at least 2.2 million Americans who have achieved 60 years and above still have student loans of $43 billion in 2012, which increased from $15 billion in 2007 (Elliot, 2014).

The increment in borrowing can be explained by the higher number of individuals pursuing post-secondary education and the rising college costs. These aspects mean that more students are likely to borrow. Furthermore, each student’s loan amount has significantly increased to cover the expenses. However, the more significant concern is whether the loans grant the students the ability to repay after pursuing education. The income they secure could be insufficient for loan repayment.

The Extent of the Problem

The lack of repayment has led to insufficient financial resources to fund other learners’ education. According to the U.S. Department of Education, the default rate in 2010 was 13.4 percent. Students who come from poor households have a high likelihood of default. In addition, those who start the payment process become delinquent at some point. After leaving higher education institutions, the economic considerations made while borrowing tend to crumble as resources remain scarce. As a result, the borrowers tend to have poor credit scores, making it challenging to grow in other areas, such as purchasing assets, mortgages, and credit cards. Researchers state that students with education loans tend to have fewer assets than liabilities. They tend to miss home ownership or postpone this acquisition. The delay affects their retirement savings as they put it off to a later date (Elliot, 2014).

What will happen if the problem is not solved?

Eventually, failure to find a solution to the repayment crisis may lead to a total lack of the program. As the country’s economy experiences difficulties, the lack of equity in distributing financial resources among learners is expected to exacerbate (The Spencer Foundation, 2008). The lack of increased funding at the state level raises concerns about the distribution criterion (Taliaferro & Duke-Benfield, 2016). Failure to provide educational funding will affect the access to education for more students. For those in low-income families, accessing teaching and securing future jobs will be the most challenging. This likelihood is considered during the award, failing to offer these financial resources to low-income people due to their high probability of default. The move is unsustainable because it may cripple the rates of literacy in the country. At the same time, the current repayment crisis is affecting other students’ availability of funds and access. Failure to service student loans is caused by a lack of motivation and ability to pay.

The current repayment crisis raises concerns about the economics of student loans at the point of borrowing. The repayment plan is based on students’ incomes who have benefitted from the loans. However, the sustainability of these payment plans is questionable, considering the default and delinquency rate. At the same time, the current repayment plans affect students’ financial security, making them ineligible for most credit-based assets and resources (Elliot, 2014). It also affects the programs’ efficacy as policymakers consider reducing their resources. This can affect the availability of such resources for learners in the future. At this rate, the repayment plan needs to be reviewed due to the high default rate and the need for access to education, especially for individuals from low-income families.

Conclusion

The default rate depicts a widespread challenge for learners who have benefitted from the financial student aid programs, which calls for a review of the current repayment plans to reduce the default rate. The current repayment plans rely on the student’s income, which is often insufficient, leading to a high default rate. In addition, the students who have defaulted have a poor credit rating, affecting their access to other credit-based assets. The current situation also calls for a review of the distribution and repayment plans to increase the program’s efficiency. The lack of repayment affects the availability of recurrent resources that other learners can use.

References

Dynarski, S. (2014). An Economist’s Perspective on Student Loans in the United States. Brookings Institution. Retrieved from https://www.brookings.edu/research/an-economists-perspective-on-student-loans-in-the-united-states/

Elliot, W. (2014). The Student Loan Problem In America: It Is Not Enough To Say, “Students Will Eventually Recover”..” Lawrence: Assets and Education Initiative (AEDI). https://doi.org/10.13140/2.1.2329.2162

Taliaferro, W., & Duke-Benfield, A. E. (2016). Redesigning State Financial aid to Better Serve Nontraditional Adult students. Center for Law and Social Policy. Retrieved from https://www.clasp.org/publications/report/brief/redesigning-state-financial-aid-better-serve-nontraditional-adult-students

The Spencer Foundation. (2008). Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid. University of Michigan. Retrieved from https://fordschool.umich.edu/news/2009/fulfilling-commitment-recommendations-reforming-federal-student-aid

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