Stafford Student Loans Program: Market Failures and Redistribution
Essay Topic:
Many government programs both redistribute income and correct a market failure. Choose a government program such as, Student Loan Programs, Public Elementary Education, Public Support for Universities, or Social Security, and write an argumentative essay that explains:
1. The market failures associated with your chosen program
2. The redistribution of the program: To whom is it for? From whom is it taking? For what perceived social benefit?
3. The most optimal way for this program to be run considering both the distributional objectives and efficiency aspects
Goals of this Essay:
● Demonstrate understanding of market failures
○ Show how government programs aim to fix market failures, but almost always contribute to or generate another market failure
● Critically analyze distributional objectives of a given program
○ Do you understand how the program runs and why?
● Identify the difference(s) between distributional and efficiency aspects
● Think outside the box, and argue how the specified market failure(s) could be minimized more effectively
The topic and rubric are in the attached file. Thank you
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Stafford student loans Program
Name
Subject
Date
Stafford student loans Program
Student loans offer learners the financial assistance needed to complete their studies. Students get access to these loans and repay them after they complete their education. The government has set aside finances such as the Stafford loan to cater to these needs and ensure that the amount is accessible to the largest number of learners. The main concern about these loans is their contribution to market failure. The paper will focus on whether or not the Stafford loan program causes market failure and the distributional objectives.
The Stafford loan program focuses on a student’s financial need to determine the eligible amount. It is a subsidized loan whereby the government pays for the interest accrued when the student is in school. These loans provide students with a low-interest loan option to facilitate the learning process, especially for those that cannot afford to pay for their education. The government’s aim for this loan is to correct the market failures caused by the inability of needy students to access quality education. When an economy has a high number of unskilled people, it has a high dependency ratio, thus causing the chances of inflation. These individuals would fill the jobs requiring fewer skills, and over the years, the unemployment rate would increase due to the lack of job opportunities. In this scenario, the unskilled citizens would rely on the skilled ones for a living. Therefore, offering students an opportunity to gain skills places them in a better position in the job market. The skills gained through education enable them to occupy well-paying jobs, thus reducing the nation’s dependency ratio and rate of unemployment.
The Stafford student loan aims to equip learners with the skills needed for the job market, thus correcting the market failures caused by a high unemployment rate. Unfortunately, the program has played a major role in causing a market failure among the youth. Students get a six-month grace period to pay for the student loan after graduation. In this case, the student should seek employment and make enough money to pay for the loan and their basic needs. The main challenge of this plan is the availability of minimal job opportunities. The students take months or years before getting a reliable job that could facilitate loan repayment. In turn, these students continue to accumulate debt, a factor that contributes to market failure. For instance, if the student cannot repay the loan within the given grace period, it would accumulate interest, thus increasing the total amount they should pay. In this case, the government does not correct market failure through the students’ loans but rather contributes to the chances of a market failure.[]
The inability of students to repay the loan has highly contributed to the total amount of consumer debt. In recent years, a student loan has accumulated an estimated $1.5 trillion in debt. The debt becomes a tax burden, a factor highly associated with market failure. Consumers would pay higher taxes to cater to the financial gap that such loans create. In a stable market, consumers should pay the minimum tax possible. There, if the amount of taxes to pay keeps on increasing, it creates the situation of a market failure.[Balmaceda, Felipe. "A failure of the market for college education and on-the-job human capital." Economics of Education Review 84 (2021): 102165.]
The market failure caused by student loans could be min...