Ending Federal Student Loans - There Is a Small Window of Opportunity to Get the Government out of Student Lending

Oct 15, 2026

Uploaded by James

Federal Student Loans briefing paper argues that Congress has a narrow, time-sensitive chance to end federal government student lending and replace it with a marketplace model using private lenders. The proposal aims to reduce harmful educational outcomes by limiting malinvestment, aligning incentives among students, lenders, and colleges, and strengthening accountability for postsecondary institutions. It also estimates substantial budget savings over the next decade, while warning that litigation and regulatory shifts could eliminate the opportunity.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages8

Reading Time20 min

AccessFree to download

Ending Federal Student Loans - Opportunity to Replace Government Lending

Why Should Federal Student Lending Be Shut Down?

Replacing the Government-as-Lender System

A Student Loan System Is Necessary

Private Lending Would Be Superior to the Current System

Less Malinvestment

More Accountability for Colleges

| | | --- | | | | BRIEFING | | P A P E R | | January 21 , 2 02 5 number 1 8 3 | Ending Federal Student Loans There Is a Small Window of Opportunity to Get the Government out of Student Lending By Andrew Gillen T he stars have aligned to present the best chance in decades of ending the federal government’s student lending and replacing it with a system that harnesses the advantages of a marketplace of private lending. This switch would save $212 billion over the next 10 years (savings that could be used in upcoming reconciliation bills) while benefiting students by helping them avoid risky educational choices. But Congress needs to move fast—the savings from making the switch may disappear due to ongoing court cases and upcoming regulatory changes. This paper explains why, how, and when this opportunity should be seized. WHY SHOULD FEDERAL STUDENT LENDING BE SHUT DOWN? Replacing the current student loan system, under which the government is the lender, with a system that uses only private lenders would be beneficial to students and 1 taxpayers. A Student Loan System Is Necessary Several factors drive the necessity of student loans. First, college is expensive, costing an average of almost $28,000 per year.2 Second, many college students enroll right after high school, which makes it difficult to finance college enrollment from current earnings. Third, many potential college students lack assets to use as collateral. For many other types of loans, a valuable asset can serve as collateral, which can substantially reduce the interest rate charged (e.g., compare the typical interest rate on a mortgage, which uses the house as collateral, to the interest rate on credit cards, which have no collateral) .3 Fourth, college is often a good investment from a financial perspective. Because college graduates tend to earn more ANDREW GILLEN is a research fellow at the Cato Institute’s Center for Educational Freedom. His research focuses on the economics of higher education, including federal and state policies related to financial aid, regulation, accreditation, financing, transparency, and accountability. than those who did not go to college, there is ample opportunity for mutually beneficial lending that leaves both borrowers and lenders better off. Private Lending Would Be Superior to the Current Government-as-Lender System Just because student loans should exist does not mean that all student loan systems are justified. Case in point, our current system is badly designed largely because students borrow directly from the federal government. Switching to a system that uses private lenders would help mitigate many of the problems with this government-as-lender system.4 Less Malinvestment Avoiding malinvestment (educational spending where the benefits do not justify the costs) is one of the primary benefits of private lending relative to government lending. A student loan system is fundamentally about addressing a liquidity constraint (a lack of available funds) that prevents worthwhile college enrollment. In other words, student loans help solve the problem of a college education being a good investment in the long term but unaffordable in the present. But just because something is labeled a “college education” does not make it a worthwhile investment. Low-quality college education, academically unprepared students, or unfavorable macroeconomic conditions could all lead to malinvestment in which the costs of an education outweigh the benefits. Thus, the goal of a student loan system is to provide financing for worthwhile investments in education while avoiding malinvestment. The government-as-lender system utterly fails at this balancing act, providing too much funding for malinvestment. Preston Cooper estimates that around 31 percent of students attend a program with a negative return on investment, and Nobel Prize–winning economist James Heckman and coauthors found programs with a return as low as ne

FAQs

What does the paper propose regarding federal student loans?

It argues for ending the federal government’s role as the lender and switching to a system that relies on private lenders.

Why does the paper say Congress needs to act quickly?

It states that the savings and reform opportunity may be reduced or disappear due to ongoing court cases and upcoming regulatory changes.

How does the paper claim private lending improves outcomes compared with government lending?

It argues private lenders have incentives to finance worthwhile investments and avoid malinvestment, and it describes improved alignment among students, lenders, and colleges.

Oct 15, 2026

Uploaded by James