Why is the federal government involved in student loans?

Going to college iincreases earnings potential. So, it makes sense for students to borrow some of the money they need to pay tuition and living expenses and repay their loans out of the extra earnings they have because of their education. But the private loan market works well only for borrowers with collateral and/or strong credit histories. If you don’t make the required payments on your car loan, the lender will repossess the car. But the bank can’t take back your college education and many students have little history with credit markets.

The federal government can offer better terms to student borrowers, providing the liquidity they need to pay for college now, in anticipation of higher earnings in the future.

The core purpose of the federal student loan program is not to subsidize students. Other public funding—including state appropriations to public colleges and federal and state grant aid—are the main ways taxpayers help students pay for college.

The main purpose of federal student loans is to solve cash flow problems. Loans provide liquidity. The federal student loan programs now in effect allow all students to borrow—regardless of their financial circumstances. Since 2010, all these loans have been made directly by the federal government. And federal loans can be repaid through programs that limit monthly payments to affordable percentages of borrowers’ incomes.

Explore more in Student Debt: Rhetoric and Realities of Higher Education Financing