If Student Loans Are So Great Why Don't Colleges Offer Their Own?

Colleges Encourage Students and Parents to Take Loans But Why Don't They? If colleges believed in their students, they would offer loans directly instead of relying on parents and private loans. Think about it: private loans hold a higher interest rate because of the lack of government guarantees. Why shouldn't colleges get involved in the same game? Many expensive colleges have tuition rates in excess of $60,000 a year.  There must be some way for colleges to invest in their students the way they ask students to invest in themselves and parents to invest in their children.  

Shifting Responsibility to External Players

Colleges avoid lending primarily because they can offload the financial risk to others.  When students borrow federal or private loans, colleges are assured payment upfront without worrying about whether the student can repay.  By contrast, if colleges issued their own loans, they would bear the risk of default, which could strain their budgets and jeopardize their financial health.

Federal programs, in particular, are structured to absorb this risk.  Loans like Stafford and Parent PLUS loans are guaranteed by the government, meaning lenders are repaid even if borrowers default.  This system creates a buffer for colleges, allowing them to set high tuition rates without facing direct consequences for the debt students accumulate.

The "Good Business" of Student Loans

Federal and private student loans can indeed be a lucrative business for lenders. These loans come with interest rates that generate significant revenue over the repayment period, often stretching decades. Private lenders, in particular, profit from higher interest rates for loans that aren’t federally subsidized. Given this, it seems logical to ask why colleges, especially those with significant endowments, don’t tap into this potential revenue stream.

Why Colleges Avoid Lending Directly

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