- This is an opinion piece.
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Just the other day I overheard someone griping about the cost of a new iPhone.
As they pulled out their iPhone X and commented about the absurd price of the phone, in my head I was thinking, “You know, if everyone wasn’t so willing to pay the steep price for the phone, the price would come down,” simple supply and demand 101.
And sure maybe the iPhone X is worth the $37 per month lease (I am not sure), this person’s comment did get me thinking about something else:
Student Loan Lending.
Since 2003, student loan debt in the United States has tripled, eclipsing $1.6 trillion dollars.
While there are many factors to blame such as societal pressures to go to college, the long term economic gain of a college degree, wide sweeping movements to get more disadvantaged students in college, and for-profit colleges just to name a few, the biggest factor might come back to supply and demand:
Colleges have almost ZERO incentive to keep tuition down.
Which is why it is time for student loan limits.
Why We Need Better Student Loan Limits
Apple knows it’s products rock. They know there is cult-like following and people will even brag about being an “Apple Guy/Gal,” or “Team iPhone.”
Just walk into my house and you will find over ten Apple products, some are stuffed in a drawer and no longer work, but you get my point. Basically, Apple knows people are willing to pay the price to have their products.
It doesn’t matter if the new iPhone costs $1,000 or $2,000 people are going to buy it.
And this is the exact same reason why we have all witnessed student loans increase to astronomical amounts over the last 15 years.
As politicians wage their war on each other, arguing about what the best approach is to fix the problem while not really accomplishing anything, one thing remains true:
There is hardly any incentive to reduce tuition costs when there isn’t a student loan lending cap.
Just like Apple, colleges know students will do whatever it takes to get into college, even if that means taking our six figures worth of debt to do so!
Quick History of Student Loans
To truly understand how we got to a point where over 7 in 10 graduates are graduating with student loan debt and the average amount is somewhere near $40,000 (As of 2016) you have to first look back in history.
In an attempt to make higher education more accessible, in 1972 the government-sponsored Student Loan Marketing Association was funded, you might know them today as Sallie Mae.
Most of the loans they funded were through Federal Perkins and Federal Stafford loans, however over the years, the federal funds shrank opening the door for more student loans and placing the burden on the states.
In 1996 Salle Mae cut a deal with Congress to transition to a private for-profit company, and like this video below states, “Sallie started wilding out!”
She jacked up interest rates, introduced student penalty fees, and lobbied Congress for friendly for-profit policy.
With all this money laying around (And no limits), colleges – the people who set tuition prices – started increasing tuition. For every $1 of federally backed loans tuition went up 65 cents, creating a nationwide cycle of rising student loan costs.
The Student Loan Arms Race
Just like college football programs recruit players- colleges have fully immersed themselves in a “College arms race,” to grab more students.
Hence the promotion of colleges on banners in the mall, why you might still get mailers at age 30 or worse, the swanky dorms popping up across the country promoting the college lifestyle.
Nevermind the education – we get lobster every Friday.
As I alluded to this earlier, the student loan crisis is a layered issue.
On one hand, you have the government and colleges, but on the other, you have parents, teachers, and counselors feeding the same narrative. Pigeon-holing kids as young as 12, students are being told to go down a path where they “Have to get a degree to be successful in America.”
I know this because as a teacher I witness this phenomenon first-hand every year with kids (Who have no business stepping a foot on to a college campus for a multitude of reasons) being told they need to go to college.
Don’t shoot the messenger, but if a student is reading at a third-grade level and drives, or they can’t show up to class prepared with a pencil… I am not saying college isn’t in their future, but let’s be serious and make sure we’re setting these kids up for success – not failure.
However, because there is a current world where unfettered student loan lending exists, that isn’t the reality. Schooling and society have pretty much created a culture of go to college OR ELSE…
Even if that means taking out countless student loans or attending a for-profit college where 1 in 2 borrowers default on their loans. Read more on whether student loan debt is worth it here.
This is why there needs to be a limit to the amount of student loans KIDS can take out.
Current Federal Student Loan Lending Limits
I really like the Mercedes C63 AMG. A black on black C63 with 510 horsepower is my dream car.
Unforuatnley for me, the car costs $85,000 (And up). Hypothetically, if I walked into a dealership and talked about financing I could potentially qualify by the skin of my teeth, however, my payments would be over $1,000 per month for a five-year term.
Keep in mind, this is after working in my career field for 10 years. However, if a 17-year-old senior hops on to the FAFSA website, no prior work expierence and sometimes no clue what they actually want in life – they can proceed to take out student loans for college.
That being said, there are Federal student loan lending limits, which can be seen in the table below (According to Federal Student Aid website):
|Year||Dependent Students||Independent Students|
|First-Year Undergraduate||$5,500—No more than $3,500 of this amount may be in subsidized loans.||$9,500—No more than $3,500 of this amount may be in subsidized loans.|
|Second-Year Undergraduate||$6,500—No more than $4,500 of this amount may be in subsidized loans.||$10,500—No more than $4,500 of this amount may be in subsidized loans.|
|Third-Year &Beyond Undergraduate||$7,500—No more than $5,500 of this amount may be in subsidized loans.||$12,500—No more than $5,500 of this amount may be in subsidized loans.|
|Graduate or Professional Students Annual Loan Limit||Not Applicable (all graduate and professional students are considered independent)||$20,500 (unsubsidized only)|
|Subsidized and Unsubsidized Aggregate Loan Limit||$31,000—No more than $23,000 of this amount may be in subsidized loans.||$57,500 for undergraduates—No more than $23,000 subsidized loans.|
$138,500 for graduate or professional students—No more than $65,500 of this amount may be in subsidized loans.
As you can see in the table above, potential borrowers must first understand the difference between subsidized and unsubsidized student loans (The government covers the interest while in college vs. borrower covers interest while in college).
The current limits allow for $57,500 for undergraduates (Up to $23,000 of this amount may be in subsidized loans) and $138,500 for graduate or professional students (Up to $65,500 of this amount may be in subsidized loans).
However, this doesn’t stop prospective borrowers from securing more funds with private and parent plus loans. Thus, making the incentive to be resourceful on both ends – borrowers and colleges – unnecessary!
Why We Need Federal Student Loan Limits
In my opinion, governments are designed to do good by its people.
Most families in America simply cannot afford to send their kids to college without student loans. However, the societal pressures (And value) of having a college degree still make college the go-to option for many, regardless of taking out student loans.
Which is why there needs to be a student loan lending limit. Colleges, the Federal Government, schools, and families need to really rethink the long term impacts of student loans.
A college degree DOES NOT guarantee success in the world we live in. It might help and it might get your foot in the door, but there are so many tangibles that college doesn’t teach.
In fact, the more degrees there are, the less value they truly have. But at the end of the day student limits would help the current trends in three simple ways:
- Colleges would be forced to reduce tuition costs and stop the arms race
- Parents & Students would rethink degree types, leverage community college and be more resourceful when it comes to figuring out college lending
- 20 something-year-olds wouldn’t enter the working world with unmanageable student loan debt
What should the limit be??
I am not sure, but there should be some sort of process to determine degree and income for starters. A music teacher shouldn't be taking $100,000 out to go teach music.
Secondly, limits may vary by state considering public colleges are state funded.
While this may not be the news some want to hear and it may not be the only solution to fixing the college problem – I do think lending limits is a step in the right direction, which leads me to this question:
Do you think there should be student loan lending limits?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎