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

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[Student Debt Is A Wasted Subsidy]

You asked should the federal government continue to subsidize student loans? Also should subsidies shift from academics to vocational programs? I give you a far more significant question to ask:

"What will it take to transform the signalling effect of a college degree?"

We're seeing that our ever indebted young agents are failing credibly to convey the message that they're worth hiring to their principal party, the employers, on the mere basis of being college grads now. But among themselves the lousy reception that this signal is getting is not being recognized for what it is: "We got a glut of college grads in a down economy."

The degree no longer carries premium.

Why bother subsidizing what is no longer in demand?

Ask a mercantilist. They always have the right answer for this one.

[Polly]

I think I see the problem as twofold:

1. The dearth of decent-paying jobs available to high school graduates drives many who maybe should not go to college to do so in order to better their chances at financial success (which is in part a function of outsourcing manufacturing and telephone customer service positions)

2. Financial priorities for states and public universities are not in sync with what's best for their students. Why do we build gigantic student unions and fancy dorms? Supposedly they attract more alumni donor dollars. Why do we pay our football coaches millions of dollars? Why do we force a university with 7% of total state funds to take on 35% of a state budget lapse? Public universities are being forced to make up funding cuts with tuition - it's not that their professors are making tons of money, either; sometimes even professors' kids qualify for free and reduced lunches in the school districts. They end up focused on Big And Shiny instead of actually helping kids graduate not only with a degree but also with the skills they need to do something with that degree.

Solutions? I don't know.

[Andy]

at private colleges the debt burden is majorly less because their parents are wealthy enough to take much of their child's expense and most of the time it is the extra fun that kids want and spend a lot on that

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"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..."

Very well said. We had so many options to complete our studies one of a million option is to support yourself by working.

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[Lorenza]

I am doing all online clasess at IVY TECH in indiana. As far as quality education i would probably say its not the greatest. But if you do your homework on time and really try, you should be able to pass the clasess. Its a little harder not having the hands on attention like with campus clasess but i LOVE the conveinence. I was able to work full time with overtime and do 4 clasess online last semester. It was hard, but you could plan out your whole week and not have to worry about going to clasess. You got your syllabus ahead of time so you knew what to expect as far as assignments. Some clasess you could even get ahead in. So with all that i Highly recommend it!!! I have never had anything come back plagarized. And ivy tech is super cheap as far as colleges go. Its somewhere in the range of 300-400 a class now. Thats for 3 credit hours.Quality wise it may not be the best but i forget 70% after a couple years anyways so. But that may be something you may want to consider. The one thing i would suggest is looking for used books online. I thought Ivy Tech books were high and had a hard time getting the ISBN numbers from the school, so i would email the professor to get it to look somewhere else for it. It can save a lot of money.Good luck!Also, ivy tech is accredited but i know some of there clasess won't transfer to some schools so you would want to look into that. Also sometimes the teacher requires you to take a proctored exam. Usually at the most twice a semester you would go to the school to take the test. I only had 1 of the 4 last semester require that. Was this answer helpful?

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[Esther]

If you have facebook, there is a group with 200+ tnshoaud members called: Cancel Student Loan Debt to Stimulate the Economy There is also a petition which you can find there.

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[Dennis]

betterschools, if you go back and read the first few sections of the HEA, such as 101, 102, on so on, and check on when the sueosctibns were last amended, you will see that you are incorrect. The only amending that has been done has been at the behest of the proprietary schools, by the masters in Congress, for example during the so-called Fed-Up initiative, which made the official definition of proprietary school part of IHEs for the first time. The changes have been all pro-proprietary, not anti-proprietary. And you are forgetting about the fiascos of 12hr rule, 50% rule, incentive comp, and so on. After 15 to 20 years of undefeated victories on legislative and regulatory fronts, the proprietaries were lulled into complacency that they would always be treated better than all other schools. Now that they are being treated the same for the first time in more than two decades, it is a cold splash of icy water on their faces. Only a few hundred schools have programs in both buckets, non-GE and GE programs. The language about certificate programs is decades' old. Yale doesn't even have an education curriculum, and I doubt that Okla. offers a lot of certificate programs. Hardly anyone pays sticker price, plus you are forgetting about the rather stringent federal borrowing limits (annual and aggregate) for students. Rulemaking is not how administrations get around Congress. Some statutory language is self-implementing such as the financial aid formula. Other statutory language needs to be filled in with regulation, or else there is no way for citizens, institutions, companies, and so on, to figure out how to comply. The statute provides only a vague framework. There is far too much vague stuff in there to get to each year, so the gov't and the community get together and prioritize. Yes, for many years the priority was to interpret things beyond the intent of the statute and thus far too loosely, at the behest of lenders, guarantee agencies, states, and institutions. If these players assumed that trend would last for 100 years, then they were grossly overconfident.You just make your stuff up as you go?

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[العاب]

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).

[Pass4ged]

If you make 2,500 a month and your payment is 1,500 a month... then you have 1,000 a month to live on.

When you both took out the loans you signed the forms saying you would repay... just like when you borrow to buy a car or a house. You wouldn't expect for your car lender to accept less than what you are suppose to pay... and as you know they could care less how much you have left over to live on after you make your car payments!!

You are going to have to find creative ways to cut your living expenses... for a very long time. Sell or get rid of anything that is costing you money. Food, clothing and shelter is all that you need to survive and you can even do things to cut those costs down to the bare minimum.

It varies from person to person of course, but you are going to have to figure out what is not optional. Phone, cell phone, internet, car, computer, your clothes dryer and even the hair cuts you get every 6 weeks are NOT necessities. Also both of you need to get second part time jobs to help get these debts down. Student loan debt never goes away. If you default, they will start garnishing your paychecks and hike your interest rates to outrageous amounts.

Unfortunately this is what excessive borrowing does to those who don't use EXTREME caution. Private student loans are evil.

This assures you can afford the payments without having to move into your parents garage to survive. (you might want to call and ask them if it's available)