Is Student Debt Excessive? Posner

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.

Comments

[Jim]

what i suggest is that the minimum age bar for a loan applicant should be raised so as the college students do not get a loan as option for completing studies...
At the same time, college fee be made flexible...

jobs for teenagers and below 25 age be increased on larger scale, so as kids interested in higher studies can save some money every quarter to pay off their college fee...

[Steven]

I'd like to know more about this claim that the returns to college education have increased over time. This is usually presented, as here, by comparison to the earnings of high school graduates. But that could be explained by a worsening in the prospects of high school graduates, by the disappearance of high paying union, factory, and labor type jobs.

I'd like to see a comparison of lifetime earnings as a function of total tuition cost. If tuition is increasing at 3 or 4% a year, are earnings of college graduates similarly increasing?

From the perspective of the individual, of course it makes sense to go to college, even at a very high cost, because the situation for high school grads is that much worse. But I suspect that the ratio of earnings to tuition paid is getting worse relative to the past. If that's true, then something should be done, I think, to try to achieve lower tuition. In other words, it might still make sense for any one student to take on huge debt for college, but it doesn't necessarily make sense to continue to allow them to do that.

Also, I think it might be a mistake to focus on the debt held by students rather than total tuition costs. Some student hold lower debt than others because their parents made up the difference, but that causes its own set of problems for them.

[Terry Bennett]

Education is an asset people buy in order to get a financial return, just like a guy who installs septic systems needs to buy a backhoe. Education is an asset that schools sell in order to turn a profit. Historically there have been and continue to be wealthy people who think education is important, and so they donate money toward it, but mostly it's a business.

It is for each provider of education to find a market niche and sell its product at an appropriate profit. It is for each consumer of education to decide how much education to buy, considering payback period and other measures of return.

Like a house, an education can reasonably be expected to pay back returns over a lifetime, and therefore it is plausible enough to pay for it over time. The problem with this particular asset is that it does not persist - it dies with its possessor. If I go to the bank and say I want to buy a backhoe and I anticipate digging enough septic systems to pay for the asset, the bank can reasonably assume that if I die before the loan is paid, they can sell the backhoe to another individual of similar aspiration and recoup their outlay, covering that risk. Education cannot be guaranteed in this way. It is always at risk, one frat party indulgence away from a 100% loss.

Enter the government. On the premise that it's a public benefit to have more knowledgeable people walking down the street, we back these "mortgages". This is great for providers and financers, to have their product deemed of sufficient importance that the collective will pay for it if necessary. The problem is that the increased credibility and comfort of government backing skews the individual's (and the provider's) calculation of the value of the investment. I would like to see students purchase private education loan insurance, just as homeowners buy mortgage insurance. This would express the true cost of the investment, and remove the public sector skewing. Implementation would of course take a big change in thinking, so it probably isn't likely to happen.

Lots of students, notably law students, have been recoiling in a big way lately and calling the presumption of the returns into question. This is what they should have been doing all along. As I say to students in my bankruptcy lectures, and as we saw so plainly during the housing bubble (another government-skewed area), the fact that someone will sell it to you is not proof that you can afford it. It happens with houses (though not so much lately), it happens with cars, and it happens with education.

As Judge Posner mentions, more granularity in education could lower the cost and raise the rate of return. In the movie "Guess Who's Coming to Dinner", the idea is floated of driving a tractor trailer around Africa with a team of highly specialized trained medics: for example, one who knows nothing but how to set broken bones. As an undergrad engineer, I took a class in the American short story. It was interesting enough, but I have yet to see how it made me a better engineer. A wise man whose name escapes me once said that anybody who ever amounted to anything had the principle hand in his own education. See Steve Jobs' Stanford address on YouTube. Every experience is education, and may provide us advantage at opportune future times. Formal education however could be made much more efficient, and in the face of the chaos in the current market for this commodity, I recommend it.

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I think it might be a mistake to focus on the debt held by students rather than total tuition costs. Some student hold lower debt than others because their parents made up the difference, but that causes its own set of problems for them.

[Mike]

Judge Posner: It seems to me that the so-called "Higher Education Bubble" has been caused, at least in substantial part, by the transformation of an undergraduate degree from a signifier of educational achievement to a filtering mechanism for raw intellectual ability. I would argue that post-Griggs v. Duke Power, employers' ability to directly evaluate prospective employees' intellectual ability has been severely restrained and, instead, employers have been relying on proxy measurements, such as making bachelors' degrees mandatory for job positions that traditionally wouldn't have required a college degree. So now we have a situation where millions of young Americans enroll in 4-year colleges (many relying on taxpayer subsidized loans and attending taxpayer subsidized institutions) merely to obtain the same kind of validation (i.e., "This person is smart enough to do X") that you used to get from a two-hour aptitude test. Seems like a colossal waste of time and money for many, many students. This wasn't as big of problem when the economy was stronger (and, of course, most people didn't think that it was a problem at all back in those days), but--like many institutions that made sense in the post-WWII era of American prosperity--it is clearly unsustainable in the 21st century.

[NEH]

"Is student debt excessive"? From the perspective of the student having to confront their debt for the first time, Yes. The real qusetion that needs to be asked is, "Why has tuition, room and board, books and supplies increased to such an extent that students are now required to borrow so much to provide themselves an Education"? Is it due to a much less than simple inflation that has overwhelmed the Educational world much like it has overwhelmed the Health Care Industry? This, coupled by a less than robust economy that can provide employment to graduates adds to the fear.

It does appear that the Economy and Educational system has once again come full circle. Where in the 16th Century on a stage in London one could hear the following:

"Neither a Borrower or Lender be
For a Loan oft losses both itself, friends and family
And Borrowing pulls the edge of Husbandry".

[TANSTAAFL]

Easy one, NEH. The huge increases in tuition, room and board, and books and supplies are driven by easy credit in the form of governmental subsidies that promote student borrowing. Colleges, like other businesses, charge whatever the market will bear, and, student loans allow colleges to jack up tuition (as Posner correctly notes above). The flood of cheap money in the form of governmentally subsidized student loans has created a higher education bubble not unlike the housing bubble created by governmentally subsidized home mortgage lending (e.g., Freddie and Fannie).

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[NEH]

affl, Let's just not blame easy terms and conditions on government backed student loans, but also within the general market that has also driven Institutional debt, Individual debt (Professors and Assistants, etc.) various suppliers and manufacturers. In most cases, student debt is but a simple response to these inflationary forces. Not too mention, massive tax-cuts that are now driving many State Institutions up against the Wall...

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[Stephanie Lee]

Both you and Becker reference federal guarantees of student loans, but I don't know how pertinent this is to the ongoing conversation, since the Federal Family Education Loan Program (FFELP) was ended in 2010 with passage of the health care bill. Under FFELP, the Dept of Ed guaranteed (technically, reinsured) federal student loans that were made via private originators (e.g., Sallie Mae, PHEAA, etc). But, no new FFELP loans are being made and now it's just the Federal Direct Loan Program (FDLP) where loans are originated, so are you suggesting the federal guarantee be revoked for the pool of outstanding loans?

[Jim O'Sullivan]

"[R]ather than" what?

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[PacRim Jim]

The decision to incur unrepayable debt is prima facie evidence that a person is unprepared for college, and probably incapable of benefiting therefrom.
Except in my case.

[jrcarter]

for college loans, check out alltuition dot com.

The big problem that is hard to talk about with regard to debt is choice of major. So many of these kids are going to school and majoring in something that doesn't teach them a life skill. Or they are majoring in something easy, and not learning how to critically think.

Many of the jobs in today's market (coders for example) don't need four years of college to be qualified for. My daughter went to an expensive private school. She received no help (I am paying for everything). She did a humanities core that taught her how to critically think. She is ready for the real world now, but still has one more year of school. The school won't let her transfer credits from a cheaper institution (community college) so we will be out 50K next year just so she can get her sheepskin.

Seems like the economic incentives for colleges are screwed up.

[heaven]

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[Brian, New York]

Some of you have touched on the heart of the matter, which is the explosion in the cost of college. In my business, there have only been two industries that have grown in the last 30 years, higher education and healthcare. Here in the Northeast, I have seen some colleges triple the size of their physical plant and the number of administrators, while increasing the number of students less than 10%. Meanwhile tuition and fees have quadrupled. Every dormitory built in the last 15 years has suites, with kitchens and bathrooms en suite. Every college has built new athletic facilities, every college has student and staff workout facilities that would rival the the largest LA Fitness you can find. Meanwhile, professors teach three classes a week, have office hours another three hours, all for 30 weeks a year. 75% of professors do no research (or if they publish, they do so in obscure journals read not even by their peers). Meanwhile, we graduate one third of our students with degrees in fields that they have no hope of finding a job.

I have a suggestion for a federal law. Very prominently on every college's home page should be a requirement for two financial statistics. The first is the percentage of the students who graduated four years previously that have been delinquent on their student loans. The second is for the previous year's freshman class, what scholarship and grant aid only teach students in the following parents AGI categories receive: under $50,000; $50,000-$100,000; $100,000-- $150,000; over $150,000. Forget about subsidized loans or anything else, the only thing that matters is how much did they give them in scholarships and grants. Everything else has to be borrowed or paid for by the families. By the way, all of the comments about student loans forget that in many cases the parents are paying or borrowing huge amounts that aren't showing up in the student loan debt statistics.

The problem is not the debt -- the problem is the cost of college. Tackle one, and the other will cease to be the problem. It is an absolute tragedy and travesty that with today's technology cheaper learning has not been instituted.

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http://www.bls.gov/news.release/empsit.t04.htm

Unemployment for college grads is 3.7%, not 'over 5%.'

[Anne Roberts]

Student debt that takes almost half a lifetime to pay? Excessive does not even cut it.

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