5 Ways Student Loans Hurt Middle-Class Kids

May 26, 2013— -- intro: Student loans are supposed to help middle-class kids pay for a college education, but these days they can do more harm than good. It's high time we did something about that.

If you imagine a world where the federal government and private lenders actually partner with students, instead of treating them as a profit center, have I got a bridge investment deal for you. As things stand, the Affordable Care Act has a better shot of garnering support among Tea Party activists than the average American kid has of getting a good deal on a college education.

Riddle me this: Why should middle-class students pay more for loans than is absolutely necessary, all the while padding the government's coffers and enabling state universities to build facilities that the students will only get to use for four years?

The answer: they shouldn't.

While no doubt there are more, here are five instances where middle-class kids are getting hosed on their student loans and student loan debt.

quicklist:title: The $50.6 billion heist. text: As Washington prepares for another epic battle over keeping federal Stafford loan rates at 3.4 percent rather than allowing them to double to 6.8 percent, an important fact goes overlooked: Stafford loans are already a significant profit center for the feds. Indeed, these loans earn Uncle Sam some 36 cents for every dollar it puts out. Bottom line: the government will reap $50.6 billion in profit from federal student loans in 2013 alone.

So instead of arguing for weeks over whether we should hold the line on Stafford interest rates, perhaps the debate is better focused on how we might cut them to a level sufficient to cover administrative costs and provide a slight cushion. That should help to make college more affordable for the middle class.

quicklist:title: Student loans fund tuition inflation. Average college debt has grown from $9,188 in 1993 to $35,200 now.text: Here's the dirty little secret why colleges and universities charge so much: Because they can. Their operating budgets are funded largely by student loans, which are repaid by students themselves. So why not pay your college president $3 million a year, spend $194 million to build or renovate a football stadium or "invest" $70 million in a pool?

Experts have suggested a panoply of solutions, including capping the maximum loan amount available to people who plan to pursue low-paying majors such as art history, or making student loans pay for education only, and not facilities like dorms, arenas or sports stadiums. (Credit.com contributor Mitchell Weiss explores more ideas along these lines.)

Whatever the solution, we have to stop this crazy cycle before it shuts the middle class out of college entirely.

quicklist:title:Till death do us part...really! text: You can never shake student loans, because unlike other types of loans they cannot be discharged in bankruptcy (with a few rare exceptions). It doesn't matter if you get laid off, are financially devastated by the illness or death of the family breadwinner or take up residence in your car. Student lenders will hound you until your last breath or they are repaid, whichever comes first.

This change to the bankruptcy laws was originally conceived to protect taxpayers, who otherwise would be on the hook if (and when) borrowers default on federal loans. After years of aggressive lobbying, private lenders eventually won the same benefit, i.e., they have the same risk of not getting repaid: Essentially zero. Yet they still charge a premium.