As discussed in chapter 4, the first goal of financial aid policy should be to ensure that all youth have access to capital to make investments in a college education, whether or not they choose to make use of it. A college education requires an intensive use of society's resources for a relatively brief period, usually early in a per- son's career. The costs of faculty time as well as the student's own time outside of the labor market are considerable. Private banks are unlikely to provide loans to many of those now going to college because the students lack collateral. A bank can repos- sess a car or foreclose on a house.
Families serve as lending institutions for many college students.
Parents may know which of their children will make good use of an expensive college education and which are not ready. Therefore, societies have developed policies to help families solve this liquidity problem, diverting the necessary resources into the hands of youth at the time they most need it to attend college, whether it be operating subsidies to institutions, wage supplements for students, or grant or loan aid. Some financing schemes are likely to be more successful than others in weeding out economically unjustifiable investments. For instance, the primary difference between a student loan and a grant is that the loan ensures that students' obligations are more closely linked to their educational choices. If students receive large institutional subsidies and pay indirectly for their education only through higher taxes later in life, there is no direct link between their schooling decisions and the amount of tax they pay.