A recent two-part series in the New York Times (“Degrees of Debt,” May 12, 14) focuses on the rise, and potential consequences, of student debt for college, which now exceeds $1 trillion. Of that amount almost 90 percent is federal, because the federal government makes student loans at low rates (there is a movement afoot in Congress to raise the rates). About two-thirds of college students graduate (or leave college before graduation) with debt, compared to 45 percent twenty years ago. Although the average debt of a graduating college student is only $20,000 or so, there is considerable variance.
In particular, the debt burden is lighter at private colleges, both because they often offer scholarships and because they attract many rich kids. The burden is heavy at public colleges (state colleges and community colleges) and heavier at for-profit colleges; they now enroll 11 percent of the nation’s college students but their students account for some 25 percent of total student loan debt.
Focusing on the public colleges and the for-profit colleges, we see an experiment in privatization. As cheap student loans become increasingly available (and the Obama Administration has increased their availability still further), these colleges are able to charge higher tuition. (This assumes, but realistically, lags in the creation of new colleges that could compete effectively with existing ones.) In the case of the public colleges, increased tuition income enables states (and local government, in the case of community colleges) to reduce their financial support of these colleges. This is a shift from subsidy to customer support, as in a private market, and is accelerating because of the poor state of state and local government finances, which has caused a cut in education subsidies and hence forced public colleges to rely more heavily on tuition income. In the case of for-profit colleges, which cater primarily to students who are unable to gain admission to public colleges and who tend to be impecunious, the availability of cheap federal loans enables the charging of tuition to students who could not otherwise afford college.
The low-interest federal loans thus provide an indirect subsidy to many colleges, in a form that preserves competition among colleges, as would not be true if the subsidy went directly to the schools. The loan subsidy is thus the approximate equivalent of a voucher system, in which schools are supported by subsidized tuition and school choice is preserved. The college subsidy is only partial, however; the loans have to be repaid—and federal loans cannot be discharged in bankruptcy, which does not prevent defaults (which in fact are common) but does reduce their incidence.
The principal economic argument for subsidizing college is that a college education equips the graduate (and to a lesser extent the student who leaves before graduation, for example with a two-year associate’s degree) with skills that increases the lifetime value of his output, which benefits society as a whole and not just the graduate. But the more that college education is subsidized, the less of this external benefit (benefit to others besides the graduate) is likely to be produced. Little more than 20 percent of students enrolled in for-profit colleges obtain a bachelor’s degree in six years (it’s supposed to take only four), and probably most of these never obtain the degree. There are many drop outs from public colleges as well. The problem ideally should be self-correcting: the lower the income boost from a college education a high-school graduate anticipates, the less debt he should be willing to take on to finance a college education, and if the net expected benefit to him is negative he may well decide not to enroll—he should decide in that case not to enroll, if one sets aside the consumption value of a college education, though that is considerable for some people. But because of uncertainty of career prospects, this is a difficult calculation to make.
The change in the financing of college from the 1950s, when I was growing up, is dramatic. In those days your family paid for your tuition and living expenses, or you received a scholarship from the college (and perhaps in partial exchange for it had to work part time for the college, for example by waiting on tables in the college dining room), or you worked your way through college, or college was free—or you didn’t go. But you didn’t borrow, and you didn’t graduate with any debt, and your career choices, and your marital plans, were not influenced by your having to pay off a substantial debt. This system of financing college education was feasible because a much smaller percentage of young people went to college in those days, in part because the financial returns to college were smaller than they are today. Student loans enable many students to go to college who couldn’t afford college without them yet would benefit from a college education, though student loans also enable colleges to jack up tuition, for which the students pay in the end unless they default on their student loans.
A complication for high school students trying to assess the value of a college education is the nation’s current economic situation. True, as in the 1930s, so now, the unemployment rate of college graduates is well below that of other workers. But it is more than 5 percent, which is twice what it was five years ago. And it is about twice that high—10 percent, at least—for young college graduates. If one adds in underemployment, that is, employment in a job for which a college education is not a qualification—for example, a college graduate employed as a waiter—the combined rate of unemployment and underemployment is almost 33 percent for all college graduates under the age of 25. (College graduates who are in graduate or professional school rather than have on average better job prospects than those seeking work with just a B.A. or B.S. under their belt.) Wages for young college graduates in the work force have also fallen.
The economy will improve (indeed is improving, though slowly and with a possibility of backsliding) and the unemployment and underemployment rates of young college graduates will fall. But no one knows when or how fast or how far. And when they do fall, still labor markets will probably be more intensely competitive than they have been, because of increased pressure of international competition in goods and, increasingly, services. This makes the value of a college education, and so the net benefit of student college debt, difficult to estimate. Still, the unemployment rate of young people is much higher than that of young college graduates, and that ratio continues to favor getting a college education even if that means going into debt.
An important question is whether the federal government should continue to guarantee student loans. Without guaranteeing them, it still could continue to subsidize them, that is, defray part of the interest rate, in order to “buy” the external benefits of a college education. The guaranty makes colleges more willing to enroll students who require loans by eliminating default risk for the colleges, but by the same token makes the colleges less careful in screening applicants. The college gets its tuition even if the student drops out and indeed never stood a chance of graduating. This creates poor incentives for college admission officers.
Another question is whether the focus of federal subsidy should shift from college to vocational schools. Employers are reluctant to provide vocational training for their employees, because once trained the employee may be hired away by another employer, who will avoid the cost of training. Federal subsidies for students at public or private schools that provide high school graduates with a range of vocational training, emphasizing technology, may provide greater value (and in fewer than four or even two years) to young people who lack an interest in or the aptitude for a “well-rounded” college education than subsidies for college tuition.