Government Loans

In the last lesson, we covered many types of government services. Many of these services, like military and police protection, are undeniably vital. Other services, such as urban planning and regulation, have both positives and negatives. Over the next few lessons, we're going to take a deeper look at a few of these government services. This lesson will focus on government loans.

Student Loans

Federal Student Loan Debt

Private Student Loan Debt

As of 2022, there is over $1.6 trillion in student loan debt in the United States, and roughly 92% of these student loans were given out by the federal government.¹ Why do you think that is? If you want to buy a house, you get a mortgage from a bank. If you want a business loan or a car loan, you go to a bank. But if you want a student loan, you go to the government. The current system of federal student loans came about because student loans are risky for the lender and have no real collateral, which makes it difficult for students to get loans from private companies.

Student loans are riskier for the lender than other loans. It's estimated that 40% of students who took out student loans in 2004 would default on their loans by 2023.² (A default on a loan means that the borrower has stopped making payments for several months. On a federal student loan, the loan is considered in default when payment is nine months late.)

Student loans also have no real collateral. When a family buys a home and then defaults on their mortgage, the bank can take back the house. The house is the collateral for the loan. The bank won't get their money back from the loan, but they can sell the house and make most, if not all, of their money back that way. But since student loans don't require collateral, the bank's only option for recouping its money is usually garnishing wages (taking a percentage of a worker's wage out of every paycheck). However, this is a slow way of recouping those lost funds, and the lender often doesn't get all its money back. Because of this risk, many private companies avoid providing student loans.

Because students were having trouble paying for their college education, the government stepped in and started providing the loans themselves. By helping students pay for education, the government hoped to improve their human capital, thereby increasing their income potential and productivity. On a large scale, this would also improve the entire economy's productivity, increasing the nation's GDP and standard of living.

The federal student loan program has certainly helped many students, but it's created many problems as well. Many students took out large student loans and, when they completed their education, discovered they couldn't earn an income that matched their expectations. This combination of low income and high debt puts those individuals under extreme financial pressure. Moreover, the government loses money when the borrowers can't pay back their loans. This difficult situation has progressed to the point that some politicians are calling for the government to forgive all student loans, which would add another $1.6 trillion to the national debt.

Credit Diverts Production

In Chapter 6 of Economics in One Lesson, Hazlitt doesn't discuss student loans, but he discusses government loans in general. As mentioned in the last lesson, farmers have historically been recipients of government loans to help them buy land, seed, and equipment. Even today, farmers can still get loans from the government. Therefore, Hazlitt spends a lot of time talking about loans to farmers. Toward the end of the chapter, he also talks about government loans to businesses and individuals. As you read, think about how the ideas in this chapter could also be applied to student loans.

READ: Hazlitt, Economics in One Lesson, Chapter 6: "Credit Diverts Production." When you've finished, click below to continue with the rest of the lesson.

Continued

One of the key points that Hazlitt makes in this chapter is that government loans are almost always riskier than private loans. After all, if private financial institutions were willing to give loans to these individuals, there wouldn't be a need for the government to step in. This means that more government loans will fail, which wastes taxpayer dollars and makes the economy less efficient. It can also ruin the lives of the individuals who receive the government loans. The government is supposedly doing people a service by giving them these loans, but that isn't always the case. Ask someone who owes $100,000 in student loans and has no way to pay it back. They would likely be much happier if they hadn't been able to get a loan for that amount. They may have been forced to go to a cheaper school or work more while going to school, but they wouldn't be buried under a mountain of debt.