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September 17, 2012 1:31 PM Fake Aid

By Daniel Luzer

Why do we call student loans financial aid? They’re not really aid; they’re debt.

As Mike Konczal points out at Slate:

I’ve taken out loans and received gifts. When I’ve signed up for, say, a car loan, I never went “Oh, you shouldn’t have” afterward, as if I had received a really nice birthday gift. I understood that the creditor wanted to lend me a certain amount of money at a certain rate, and I wanted to borrow it. Full stop. Unless the interest rate charged is purposely manipulated for some reason, there’s no reason to think of this as aid at all.

Now, granted, the interest rate on federal student loans is manipulated, but so are the interest rates on all loans; student loans are just manipulated differently.

It’s the interest rate on students that gives the government money to allow it to offer loans to more students. It’s a nifty financial trick and it’s arguably even a progressive and quite beneficial financial trick, but it’s still not really aid in any useful sense. Konczal again:

Student loans are an economic transaction, the same as if the government had contracted out to build a bridge or hired a person to serve in the military or police force or be a teacher. The money spent here isn’t “aid.” Hiring someone to build a bridge exchanges labor for cash.

Right. It’s not like mortgages are housing aid. Aid is a grant you receive. A loan is just a loan.

The other strange, and misleading, thing about calling student loans aid is that it allows colleges to sound generous when they’re not really being generous at all. As Lynn O’Shaughnessy explained earlier this year “financial aid” letters from colleges are often strangely misleading. “The cynical explanation for unhelpful financial aid awards,” she wrote, “is that many schools don’t want families to know when an offer is pathetic. Obfuscation is an effective way to keep parents off balance.”

And that tactic appears to work rather well. But these are family finances here. It’s not time for a marketing ploy. If the institution is earning a profit from the financial interaction, fine; there’s nothing wrong with that, but it’s not aid; it’s a business transaction.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • Tramey on September 17, 2012 3:42 PM:

    I am pleased to say that the college my daughter goes to very clearly delineates between aid (merit-based and needs-based scholarships and grants) and loans. And all the money information is bundled under a headline "Finance your education". Refreshing honesty, I think.