Student debt and outcomes

Far better than legislation to socialize the cost of college education would be for Congress to ensure interest rates for loans reflected the true risks/rewards behind specific colleges and degrees. Nick Phillips lays out “how we got here” and the specifics of what a modest but important market-based reform to American higher education policy might be:

Total student loan debt has tripled since 2004 and currently amounts to $1.31 trillion, making it the largest consumer debt category in the country behind mortgage debt. Current default rates stand at 11 percent, eerily mirroring the peak of mortgage delinquency rates during the subprime crisis. And student loans carry the highest delinquency rate of any category of consumer borrowing. This should worry everyone.

The growth of student loan debt has depressed home ownership and consumption, creating an ever-growing headwind to economic growth. Missed payments ruin the credit ratings of individual borrowers and limit their capacity to assume risk—for example by starting a new business or moving to a new state.

The harms aren’t just economic. By dampening entrepreneurialism and creating a new generation of immobile, risk-averse young people, student debt actually has the capacity to change our national character. Borrowers have lost confidence in themselves and have turned instead to government for protective bailouts.

Hopelessness is festering into radicalism. Young people are furious with these restraints on their mobility, and currently that fury is being channeled by Bernie Sanders with his plan to socialize the cost of public university for all students. Instead of ceding this all-important ground to progressive activists, conservatives should be leaping over themselves to propose solutions to this catastrophe. After all, it was created by the federal government.

That federal government holds over a trillion dollars of student loan debt, and taxpayers are expected to take a net loss of $170 billion on these loans over the next decade. And the losses will only get worse. The easy availability of federal aid incentivizes universities to keep raising tuition. Taxpayers cover those costs upfront in the form of federal aid, while the universities have no skin in the game if their students default after graduating. Tuition thus goes up and up, and the dominant policy response is always to make federal aid even more available, inflating the bubble further. …

When the government keeps interest rates artificially low for degrees that in fact carry a high risk of default, it induces more people to sign up for risky programs. Interest rates are supposed to act as a signal that such programs are not good investments. Absent that signal, students with unsophisticated understandings of personal finance and the labor market (and hopped up on Baby Boomer platitudes about following your passion at all costs) see no reason not to go deep into the red to attend a barely accredited university and major in film studies. …

The easy availability of federal money disincentivizes universities from lowering tuition or improving the quality of their education, while incentivizing bad universities that sell a terrible product to stay open. Under this scheme, student borrowers and taxpayers suffer together. Every incentive is misaligned. An injection of market principles is essential medicine.

The example Nick cites, of Thomas M. Cooley Law School, is devastating. No way that institution stays open, except for government policy that enables easy student debt from credulous young people:

The largest law school in the country is Thomas M. Cooley Law School. Its tuition is $50,790 per year, roughly equivalent to top law schools like Yale ($59,865), Berkeley ($52,654), and UT Austin ($50,480). And of course, the government will help you borrow at the same rate to attend Cooley as those other schools. But Cooley is not these other schools. Cooley is the worst subprime risk imaginable. Seventy-five percent of its graduates were not employed in the legal field one year after graduation. Fifty percent of its graduates weren’t employed at all. No rational lender would touch it, but the government’s drive for equity keeps it open. For the sake of its prospective students, Cooley must be made to get cheaper, get better, or close.

At some point, when the student debt bubble bursts, many people will be crying alligator tears and putting on a show to ask, “How could this happen?” Anyone who cares enough to pay attention to this issue knows exactly what’s happening—but it’s so much more attractive to get paid in whatever way by exploiting the present system, than to agitate for its collapse.

Those hardest hit are the students and professors themselves, but the lie that “access to higher education” is always and everywhere a path to success is too sweet a promise to contest—even if generations are stuck with trillions in debt to finance a law degree that’s left them jobless.

If I were a trustee or administrator in higher education, I would prepare for the inevitable shocks to come by trying to make my institution not the “most student friendly” college, but actually the “most professor friendly” college. Walking down that path ensures a robust college for decades to come, led by sparkling talent who will ensure young people continue to enroll even if debt-financed tuition becomes harder to obtain.

And it’ll be a heck of a lot more just for the professors and students, too—ostensibly the people who are at the heart of any great college.


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