When I was researching payday loans, I came across an interesting statistic: Within three years of entering into repayment, 13.7 percent of federal student loans wind up in default.

So it made me wonder. What is the difference between payday loans and federal student loans?

The default rate for payday loans is considerably higher, but the economic stakes are vastly greater, in terms of dollars, for student loans.

A quick look at current direct federal loans in repayment shows an average balance of more than $26,000.

Even assuming that the average payday loan amount is $500, a high assumption, a single federal student loan borrower carries more than 52 times the burden of a payday borrower.

Look at the difference in marketing as well. Most Americans realize payday loans are a raw deal and a poor financial decision; that’s why they have become a favorite political target. In stark contrast, student loans are accompanied with a narrative that you either take on a massive debt or your future will forever be compromised.

You don’t have to like payday loans to see the similarities. Payday loans offer relatively small amounts of money in anticipation of a payday in the near future. Federal student loans permit students to take on massive amounts of debt in spite of the fact that many, if not most, are not working and have no immediate job prospects. In many instances they have a co-signer, like parents, on the hook as well.

If that weren’t enough, student loan debt is generally not discharged in bankruptcy unless repayment would create an “undue hardship” for the student borrower or his or her dependents.

It doesn’t sound right, does it? If there is outrage over payday loans keeping lower-income Americans on the debt cycle, why is nobody questioning federal student loans?


A politician simply pointing out the math and potential hazards of student loans will be branded as denying access to education. Period. And that’s not a political winner.

Federal student loans also create other types of problems. They drive up the costs of higher education.

There are exactly two ways to control the costs of higher education for students: government fiat or market forces. State-run higher education – we’re talking “free” education in places like Germany – is fully funded by taxpayers at no cost to students. Most gainfully employed graduates will eventually feel the cost in the form of significantly higher taxes when they enter the workforce. Since we generally don’t want the government to run even more of our lives in America, we don’t do that.

The other option is letting markets operate freely. When enough people cannot afford the prices of higher education to keep those institutions operating, educators are motivated to offer similar education options at lower prices. But many Americans dislike the idea that ability to pay determines higher-education options. So we don’t do that either.

Instead, we have created the worst of both worlds: An essentially private system of education fueled by taxpayer support and government-issued loans, knowingly provided to many students who will struggle for decades to pay them off.

For some students, the skills learned from an undergraduate or graduate program may indeed be worth the significant debt they take on. Repayment may happen relatively quickly. Many others will literally fight student loan debt for a significant portion of their adult lives.

At the end of the day, the difference between payday loans and student loans may simply be that students have a better chance of a positive economic future in exchange for taking on radically higher economic stakes.

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