The student loan system: a promise is a promise – Charan van Krevel

RIJSWIJK - Het omzetten van de studiebeurs in een sociaal leenstelsel voor studenten is een van de bezuinigingsvoorstellen. In aanloop naar de Tweede Kamerverkiezingen op 9 juni presenteren de verschillende politieke partijen hun verkiezingsprogramma, waarbij rekening wordt gehouden met forse ingrepen. Het kabinet heeft vorig jaar ambtenaren gevraagd te zoeken naar mogelijkheden om structureel 35 miljard euro te bezuinigen. 

The student loan system: a promise is a promise

By teacher Charan van Krevel

With the upcoming parliamentary elections around the corner, criticism on the current student finance system is starting to swell. The current student loan system replaced the basic grant in 2015, with the result that a completed study now does not generate a gift, but a substantial loan from the government for almost every student. Is this new system desirable in retrospect? And if not, what can you, as a student, do about it?


Why a loan system?

The main argument in favor of the student loan system (or rather: against the basic grant) is that the government must pay for the study of the lawyer's son. This government support is distributed to a wealthier group and financed by, for example, income tax on the cashier and stock filler, according to proponents of the loan system. In fact, this argument is a direct copy of the position of Neoliberal and Nobel laureate Milton Friedman (1912-2006). “The benefits accrue to the individual, and these individuals are mostly middle- or upper-class families. Meanwhile, the low-income class shares the tax burden.” Many would agree with Friedman that government policies that actively increase inequality are undesirable; but is this argument correct?


Wealth inequality

We Dutch are often proud of our solidarity, as witnessed by the large gap between the income inequality (Gini coefficient) before and after tax and social security. Apparently, the Dutch government succeeds in suppressing income inequalities. However, such statistics are deceptive. The Netherlands has the highest wealth inequality in the world. Equity is the net worth of all your assets (a stock variable), while income is the gross positive change of assets within a time period (one year). Many leading economists such as Joseph Stiglitz, Thomas Pikkety, and Amartya Sen argue that wealth is far more important to our well-being than income. In the Netherlands, the most unequal country in the world, wealth inequality has been increasing for decades. This means that government policy is failing to actually bridge the differences between poor (less wealthy) and rich (wealthy).


The dark side of the loan system

Despite the loan system trying to make student grants fairer, the first signs are that it unintentionally increases wealth inequality. A student loan turns out to be a huge obstacle for young people to start growing capital. Take myself as an example. I will not receive a mortgage because of my original student loan. The bank is only interested in the original amount of my student loan - it is quite high - and not impressed that I am paying off quickly. A multiple of my original loan is deducted from the maximum amount to be borrowed. The nearest house I can buy is across the border from our southern neighbors! Despite a rent of € 1000 a month, the bank considers it a great risk that a university lecturer cannot afford a monthly mortgage payment of € 600. As a result, I am building € 1000 less in capital per month, because I do not come from a prosperous family. On the other hand, the lawyer's son usually does not need to borrow and can quickly start growing capital. For these and many other reasons (which we discuss during Economic Policy and Public Finance, block 4 - shameless self-promotion) the solidarity-intended policy turns out to be unsolid and we see why Milton Friedman is wrong.


A promise is a promise

In 2015, the cabinet promised to invest the substantial savings (approximately 1 billion euros per year) directly in the quality of education. In the most optimistic case, the promised improvement in quality through the capital injection can be called substandard. Working groups are getting bigger and the work pressure for your teachers has been extremely high and increasing for years. Fortunately, political parties are revolting against the loan system - just before the upcoming parliamentary elections on March 17th, 2021 (coincidental!). It is therefore up to you as a voter to make your vote count. In a nutshell, the Public Choice literature states that the rational politician fights for the groups of people who represent the most voting power. Young voters (up to the age of 34) are unfortunately the worst represented. Despite being a significant part of the electorate, we are underrepresented in political discourse. Older people (55+) vote more often and are better represented. Lack of political commitment and lack of representation are like a chicken and an egg: if you don't feel represented, it's probably because people like you vote less often! That is why I recently called on students to vote en masse.

In the context of the loan system, you can study the party programs: which party is in favor of the abolition of the loan system, and which party is in favor of a cancellation of study debts? But be careful; the voting behavior of politicians does not always correspond with their plans. Also applicable to politicians; stated preferences are not revealed preferences.


Word of thanks

Once a month there will be published an article written by one of our teachers economics at the Radboud University. We really appreciate the contribution of the economics department a lot. This month we may thank Charan van Krevel, teacher/researcher in Economic Theory and Policy, for his article about the student loan system.