Student loans are a regressive tax ? mathbabe

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I don?t think this approach of looking at student loans is new, but it?s new to me. A friend of mine mentioned this to me over the weekend.

For simplicity, assume everyone goes to college. Next, assume they all go to similar colleges ? similar in cost and in quality. We will revisit these assumptions later. Finally, assume that costs of college keep going up the way they?re going and that student loan interest rates stay high.

What this means when you put it all together is that sufficiently rich people, or more likely their parents, will pay a one-time very large fee to attend college, but then they?ll be done with it. The rest of the people will be stuck paying monthly fees that will never go away. Moreover, because the interest rates are pretty high, the total amount non-rich people pay over their lifetime is substantially more than what rich people pay.

This is essentially a regressive tax, whereby poor people pay more than rich people.

Other points:

1. The government student loans don?t have interest rates that are extremely high, but there?s a limit of how much you can borrow with that program, which leads many people even now to borrow privately at much higher rates.
2. In the case of government-backed student loans?this ?tax? is essentially going to the government. In the case of?private student loans, the private creditors are receiving the tax.
3. Since you can?t discharge student debt via bankruptcy, even private student debt, it really is a life-long tax. It?s even true that if you haven?t paid off your student debt by the time you retire, your social security payments get cut.
4. What about our assumptions that all schools have the same quality? Not true. Rich people tend to go to better schools. This means the poor are paying a tax for an inferior service. Of course, it?s also true that truly elite schools like Harvard have excellent financial support for their poorer students. This means there?s a two-tier school system if you?re poor: you can go to a normal school and pay tax, or you can excel and get into an elite school and it will be free.
5. What about our assumption that all schools have the same cost? Of course not true; we can look for better quality education for a reasonable price.
6. What about our assumption that everyone goes to college? Not true, but it?s still true that going to college and finishing sets you up for far better wage earning than if you only have a high school diploma. And although going to college and not finishing may not, nobody think they?re the ones who won?t finish.

Conclusion: Either we have to keep costs down or we have to make college government-subsidized or we have to make student loan interest rates really low or we have to offset this regressive tax with a highly progressive income tax.

Source: http://mathbabe.org/2012/10/02/student-loans-are-a-regressive-tax/

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