What Would Happen If Student Loans were Eliminated?

What would happen if colleges stopped accepting student loans?  For example, what if a state legislature passed a law that said that student loans could not be used to pay for tuition or other school costs at state universities?

First of all, either tuitions would need to set at a level that most prospective students could afford or enrollment would decline.  This would mean tuitions in the range of maybe $2000 per semester – about as much as students could make delivering pizza or doing other similar jobs during the school year.   A family could also save up about $16,000 and be able to pay for tuition for a four-year degree.  Given that a family if able to save $2000 per year in an educational IRA, this would mean about 8 years’ worth of saving would be needed for tuition, with the other four years used to save for room and board.

Students would also need to cut room and board costs.  I remember at UC Berkeley going to the house of a group of Scandinavian students.  The place where they were living was a house with every room save the kitchen rented out separately.  It was somewhat cramped but also probably fairly cheap and communal.  I would guess they were probably only paying a couple of hundred dollars per month or about $2500 per year.  This type of arrangement might be the norm rather than students getting apartments with pools and work-out facilities.

The number of students with part-time jobs would also likely increase.  Parents would also probably start saving more seriously too, but it is likely that students would share at least part fo the burden.  This might crimp the social life, meaning less time in bars consuming large quantities of alcohol, and probably less time on Facebook and twitter and playing World of WarCraft.  It would mean that the students would have experience with a job – and probably and entry-level one at that – which would be useful experience for their later life.

Because of this decline in tuition, the universities would need to cut expenses.  This means a decline in the cost of things like student unions, recreation centers, and fitness centers.  While these are all nice, surely the huge, expensive facilities that have been erected lately aren’t all that needed.  If the goal is to provide an education, these frills could be scaled back. 

The universities might also need to get a bit more selective in the faculty that are kept on and in the retirement benefits of employees.  University administrators might also need to take a pay cut, but with salaries exceeding $500,000 per year in some cases, this might not be such a bad thing.  The university plane would also need to go, as would the expensive athletic facilities and private faculty clubs.

Finally, the traditional four-year college might not be quite so traditional.  Students might elect to take lower level classes – especially remedial classes covering topics they should have learned in high school – at community colleges rather than going straight to a university.  They could continue to live at home for a couple of more years, gradually making the transition into independent living.  Perhaps the norm will be to spend the first two years at a community college and then transfer into a university.  Given that they would then be taking only the higher level classes that the professors actually want to teach at the university, instead of all the 101 weed-out classes foisted on grad students, they might actually get a better educational experience.

Would this result in great students from poor backgrounds not getting to go to college?  The universities would continue to offer scholarships to the best students.  In fact, they might increase the number of scholarships (and maybe alumni would be more likely to give if they knew the need was dire).  There are also many community-group scholarship for which those with the needed drive could apply.  With lower tuition rates and low living costs the norm, it would not be as difficult to pay for things with employment at the university or off campus.  The total cost would just be lower for both.

Best of all, students would come out of school debt-free.  They would get to start their lives without the burden of student loans hanging over their heads, and would have experience showing up to a job and putting in a good day’s work as well.  For prospective employers, knowing that the new graduate they are hiring has a good work ethic would be attractive.  If a student dropped out without a degree, they would not need to repay a loan for which they did not receive a diploma.  In short, I fail to see the downside.

Do I expect to see this happen in any states any time soon?  No, not really.  But except for lowering tuitions, there is nothing to stop someone who wants a good start in life from following some of the suggestions presented.  Is that normal, no.  But normal people are in debt all of their lives.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Jade Gordon, Website http://www.jadegordon.com/portfolio/ , downloaded from stock.xchng


  1. Before World War 2 I believe only 6% of citizens went to college. The GI Bill boosted that number significantly. If you eliminate all financial aid, why won’t we fall back to maybe 10-20% college attendance rate? Right now I think it is about 80% at least attend some college. You just assume the schools will roll rates back 80-90% somehow.

    • College tuition rates have risen far faster than inflation, largely because 1)states are paying less of the costs and 2) because universities are building more and more elaborate facilities in a university “arms race” to attract students. They have the ability to raise tuition with impunity because students can get loans to pay whatever tuition they charge. This leads to students leaving college owing a house, and then not taking entry level jobs because they worry they won’t be able to pay their loans back.

      Without student loans, students would choose lower cost option, like doing the first two years in community college rather than paying full tuition and room and board to take classes on material they should have learned in high school. Universities would see enrollments fall off, meaning they would need to cut costs (no more university planes, no $500,000 president’s salaries, no presidential mansions). They would also see enrollments drop a bit, meaning they would need fewer professors and fewer buildings, and therefore lower tuitions.

      In addition, while families might need to shift priorities, and student life might not be as posh (meaning more students would work to graduate faster and probably have a job during summer), those who set college as a priority would find a way. Those who really come from poor families would still get grants.

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