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The real scoop about the costs and benefits of student loans

Published: Friday, July 3 2015 3:21 a.m. MDT

What are the real costs and benefits behind federal student loan lending? (Shutterstock.com) What are the real costs and benefits behind federal student loan lending? (Shutterstock.com)

Student loan debt has already surpassed credit card debt and tipped the scales at more than $1 trillion, according to Consumer Finance Protection Bureau reports.

Because of this, many people have become upset about why their tax money is being used by the federal government for student loans in the first place.

This brings up an important thing to consider, namely, what are the real costs of federal student loan lending, and what are the tangible benefits?

Cost: not as big as you might think

In 2012, the federal student loan default rate was calculated to be 13.4 percent. But despite this substantial default rate, about 80 percent of defaulted federal student loan debt gets recovered successfully, according to the U.S. Department of Education.

This collection rate is quite high, especially when you consider that recovery rates for most collection agencies are typically around 20 percent.

This success is made possible by the fact that the federal government has given its lenders extraordinary means of collecting debt from defaulted student loans, far beyond what is legally possible for private lenders.

For example, lenders of federal student loans do not have to file judgment against a borrower, or sue them, in order to garnish their wages, seize their bank accounts or place a lien on their property.

As a result, lenders of federal student loans have a much greater success rate when collecting delinquent debts owed.

Once you factor in the 80 percent recovery rate for defaulted federal loans (including collection costs), less than 3 percent of all original money lent out to borrowers is ever lost, according to the U.S. Department of Education.

However, 3 percent of $1 trillion is still a considerable cost — especially when you add in the amount of student loans that will be written off once the IBR program reaches 25 years.

This amount is especially poignant, since it’s coming out of taxpayer’s pockets. Does this cost outweigh the benefits?

The benefits: students plus society

If the federal government was not investing in student loan lending, this might prevent more than half of all students in the U.S. from having the financial means to attend college.

The requirements for receiving federal student loans target the students who would not be able to afford advanced schooling otherwise. These students likely would not qualify to receive a typical bank loan.

The Chronicle of Higher Education reports that 60 percent of all those who attend college have utilized federal student loans to help pay for their schooling.

In addition to the students themselves, everyone in society benefits from government’s spending in higher education — especially in the form of financial return.

Over their working lives, people ages 25 to 34 with bachelor’s degrees earned 114 percent more than those without a high school diploma.

Plus, those with advanced degrees earned two to three times as much as high school graduates, according to the U.S. Census Bureau.

The higher earnings of educated workers are also generating higher tax payments at the local, state and federal levels.

The average college graduate pays over 100 percent more in federal income taxes and about 75 percent more in total federal, state and local taxes than the average high school graduate, according to the U.S. Census Bureau.

More taxes owed produce a huge return on any national investment in higher education, according to the National Center for Education Statistics. Furthermore, the work habits of the college educated promote widespread increases in productivity throughout society. Consistent, productive employment also reduces dependence on welfare.

All benefit from the higher tax revenues, the lower demands on social support programs and the increased productivity produced by college-educated adults. But there are also some other tangible benefits beyond a simple return of financial investment.

According to the Bureau of Justice Statistics, the college-educated are four times less likely to be incarcerated than high school graduates.

“Adults with higher levels of education are more likely to engage in organized volunteer work, to vote, and to donate blood. They are also more likely to be in good health and less likely to smoke,” the Bureau of Justice Statistics says.

These are reminders that the investment our government makes in higher education is more than a simple act of charity of providing for those who are less fortunate and seeking further opportunities. It is a necessary measure that supports the prosperity and growth of our country.

Even if you didn’t benefit from federal aid yourself, chances are that many of the people you work with and rely upon wouldn’t be where they are without it.

Federal student loan lending practices may not be perfect, but they’re a positive step in the direction of fostering a better social and national quality of life.

Jan Miller is a student loan consultant and founder of Miller Student Loan Consulting, a company devoted to giving borrowers customized student loan repayment plans that fit their budgets. EMAIL: info@student-loan-consultant

Copyright 2015, Deseret News Publishing Company