Getting Beyond the Student Loan CrisisAs freshmen enter their first year of college, most believe?along with their parents?that a college degree will guarantee a job with a better salary than they would have earned if they had gone directly into the workforce right out of high school.
The fact that most students need to take on massive debt to pay the skyrocketing cost of college does not deter them, since they believe their higher income will enable them to pay off the loans and still come out ahead.
Sadly, this cost/benefit scenario is not panning out for a significant number of students. They are accumulating the debt, but a large portion is not deriving the benefit. Consider the facts:
- In 2011, the average four-year college graduate owed $26,600. In 2004, this number was $18,650.1
- In 2012, outstanding student debt surpassed $1 trillion. This was a first. In 2003, the debt was one-fourth this total.2
- Outstanding student debt is now held by nearly 20 percent of all U.S. households. This compares to only 15 percent in 2007.3
- Of the households headed by someone younger than age 35, 40 percent are carrying debt from student loans.4
- Since 2007, not only has the size of the average debt increased, it has taken place in nearly every demographic and economic category.5
If the vast majority of these borrowers were gainfully employed and paying down their balances, there would be less concern. But this is not the case.6
- According to the U.S. Department of Education, in the first quarter of 2013, $3.5 billion in government and private student loans went bad.
- There are currently 6.8 million federal student loan borrowers in default.
- These borrowers owe a total of $85 billion, and the departments systems for collecting the bad loans are not keeping up with the defaults.
Up until 2010, student loans were provided by a mix of government and private institutions. Then the federal government eliminated private middlemen. As a result, by 2012, 93 percent of all student loans were issued by the federal government. The amount of these loans now exceeds the total credit-card debt of the U.S. population.7
Since the student loans are backed by the government, taxpayers foot the bill of defaults. This cost is added to the taxpayer funding of government Pell Grants, which have increased over the years. The cost of these grants jumped from $25.3 billion in the 2009-2010 academic year, to $34.5 billion in 2011-2012.8
The growth of these grants mirrors the growth in tuition and the growing inability of students to pay for college. This increase in the cost of tuition is the prime factor that is inflating the growing student debt bubble. This cost is growing at a rate that is 10 times the increase in the costs of food, housing, and healthcare. It is also growing faster than inflation and wages.
As tuition costs rise, the government subsidizes the difference with increases in federal loans. Its a vicious cycle where students borrow more to pay the higher cost, which enables schools to raise prices even further. The usual effects of supply and demand that set prices are removed by the availability of government loans.
But its not just the rising dollar amounts of the loans that are creating the student loan crisis. Its the insidious practice of making loans available to virtually anyone who wants one.9 Its the same thinking that fueled the subprime mortgage crisis.
The government monetary policy of "easy money" for housing loans, without a close scrutiny of the borrowers ability to pay, contributed greatly to the housing boom and subsequent bust. The same type of policy is now dominating the higher education market.
To qualify for a student loan, borrowers do not have to prove that they can pay off the debt; instead, loans are based on the students financial need. This is because the governments vision for the loan program is fundamentally flawed. Rather than seeing it as a means for helping students gain skills that will improve their value in the marketplace, the philosophy is simply that everyone should go to college. The goal of the loan program is to make this dream happen.
College-for-everyone has become conventional wisdom over the past 50 years. It is promoted by parents, high school guidance counselors, and of course, college admissions offices. What is missing in this line of reasoning is that getting a diploma does not magically produce a job that will enable repayment of student loans.
Because of this blind spot, loans are being offered with no thought about whether there will be gainful employment upon graduation. This practice is grossly irresponsible: It wastes public money, provides colleges a strong incentive to admit students who are unqualified, and reduces a large proportion of students to indentured servitude.
The very nature of student loans is risky, since students have no credit history, but the governments lax loan policy compounds the problem. There is no attempt to differentiate between students with majors that are in demand by employers, such as healthcare and computer science, and those studying in fields such as political science and the arts, which have high unemployment rates. This is setting many students up to begin life in a financial hole, loaded with crushing debt, and without a way to escape.10
Students certainly share the blame for the growing debt crisis. Before embarking on a particular career track, they need to research the field they are pursuing to determine the employment prospects and potential income. Simple math will tell them if taking on loans to get there makes financial sense.
Unfortunately, too many students enter college with the mindset of a tourist. They are there to have an experience and enjoy four years of fun. The side benefit is a diploma at the end of the experience that they believe will usher them into the working world. They incorrectly believe that all fields of discipline are equal and that any field, be it gender studies, sociology, or ethnic studies, will be a path to a well-paying job.
This is, of course, is not true, and as a result, a significant portion of college graduates are not equipped to meet the demands of the modern workforce. In fact, of the college graduates in 2010-2011, more than half were unemployed or greatly underemployed. In addition, many employers today give a low grade to current graduates, categorizing them as unprepared or only somewhat prepared for the job.11
For the students who didnt choose a field that offers greater opportunities, their plight is made even more painful by a slow economy, which is also contributing to the looming crisis. The unemployment rate for Americans in their late teens and early 20s is over 25 percent, when all factors are considered, including students who have simply given up looking for work.12 But even 25-34 year-olds who are employed face a tough challenge. Wages for this age group have dropped by 10 percent since 2007.13
The effects of this debt crisis are impacting both students and society as a whole.
Many college graduates with tens of thousands of dollars in loans cant find high-paying jobs, or any jobs at all. They will spend years trapped in adolescent limbo; unable to support themselves, many will move back home with their parents. Bankruptcy will not discharge their loans, and if they default, they face years of poor credit scores.14
But even in the best-case scenarios where graduates secure good-paying jobs as a result of their degrees, there are still negative consequences. Starting out with student debt delays them from making other financial choices, such as buying cars and homes, and even starting families. Not surprisingly, a recent Rutgers University study discovered that 40 percent of students who graduate with a four-year degree paid with the help of student loans are now delaying big-ticket purchases.15
It is this lack of typical economic activity by 20- to 30-year olds entering the marketplace that is having a negative impact on society at large, since consumer spending makes up 70 percent of the countrys GDP. A report from the International Institute of Finance reveals that housing prices are remaining low in part because people under the age of 30 cant afford to buy homes. This, in turn, is playing a part in delaying the broader economic recovery.16
Another drag on society created by the burgeoning amount of student loans is the growing number of defaults, which is likely to get worse before it gets better. Some estimate the default rate will soon grow to 40 percent.17 This will be a permanent drain on taxpayers, because the unpaid balances will contribute to the ballooning federal debt balance.
The lesson of history is clear. High levels of debt, particularly bad debt that is government induced, always leads to a financial crisis. Thats the unmistakable pattern we see when we look at the Asian debt crisis in the late 1990s, the more recent Greek debt crisis, and the U.S. subprime mortgage debacle. The student debt crisis is likely to follow this same pattern, unless aggressive steps are taken to prevent it.
Given this trend, we offer the following forecasts:
First, its likely that the worst of the student debt crisis will be averted by building a "risk-assessment component" into all new student loan applications.
This added factor will take into consideration the credit-worthiness and past academic performance of each student, as well as his or her likelihood of graduating, odds of finding a job, and expected income. This exercise will increase the probability that the loan will be repaid, and defaults will be minimized. An evaluation number, much like a FICO score, would be based on a formula that includes grade-point average, college major, and academic institution. For example, a science, technology, engineering, or mathematics major at high-ranking institutions would generate a higher score than a religious studies major at a lesser-ranked school.
Second, another practice that will help deflate the student credit bubble will be requiring academic institutions to track the career performance of recent graduates by major.
Reporting the salaries of an institutions recent graduates who obtain jobs would be instructive to prospective students and their parents. In a similar vein, high school students need to be educated regarding the value of alternatives to four-year colleges, such as trade and technical schools. Just as it took the recession and housing meltdown to teach the lesson that not everyone should own a home, so the student debt crisis will wake America up to the fact that not everyone should go to a four-year college.
Third, colleges will aggressively fight needed reforms because it means that they will have to compete in the marketplace.
In fact, recent research cited by former Secretary of Education William Bennett shows that only 150 of the 3,500 colleges in the U.S. are worth the investment.18, 19 This study considered the lifetime wages of the average graduate, the wages lost while attending, and the total cost of the education. Under a properly designed "risk-assessment" program, the other 3,350 schools would either have to improve their performance dramatically or lose student loan financing. Even many schools with an acceptable mean ROI will face wrenching change as lenders recognize that science, technology, engineering, and math graduates are offsetting the poor ROI of liberal arts programs.
Fourth, once the needed reforms are made, everyone will benefit.
Students who qualify for loans will be more likely to receive a high-quality education that will translate into a well-paying job that will enable them to pay off their debt. High-school graduates who are diverted into trade or technical schools will enter the workforce without the crushing burden of loans they cant repay. Young people in both categories will be more likely to purchase cars or homes, and this in turn will boost those sectors of the economy. Taxpayers wont have to absorb the losses from bad loans.
References
1. American Thinker, March 29, 2013, "Student Loan Crisis Getting Worse," by Rick Moran. 2013 by American Thinker. All rights reserved. http://www.americanthinker.com/blog/2013/03/student_loan_crisis_getting_worse.html2. FOX Business, March 13, 2013, "Real World Impacts of Growing Student Loan Debt," by Kate Rogers. ⓒ 2013 by Fox News Network LLC. All rights reserved. http://www.foxbusiness.com/personal-finance/2013/03/14/real-estate-market-and-college-debt-holding-back/3. Ibid.4. To access the Pew Research Center report "A Record One-in-Five Households Now Owe Student Loan Debt," visit their website at: http://www.pewsocialtrends.org/2012/09/26/a-record-one-in-five-households-now-owe-student-loan-debt/5. Ibid.6. American Thinker, March 29, 2013, "Student Loan Crisis Getting Worse," by Rick Moran. 2013 by American Thinker. All rights reserved. http://www.americanthinker.com/blog/2013/03/student_loan_crisis_getting_worse.html7. CNN News, December 6, 2012, "The Looming Crisis of Student Loan Debt," by William J. Bennett. 2012 by Cable News Network. All rights reserved. http://www.cnn.com/2012/12/06/opinion/bennett-student-debt8. The American, May 14, 2013, "The Looming Student Loan Crisis," by Jackson Toby. ⓒ 2013 by the American Enterprise Institute. All rights reserved. http://american.com/archive/2013/may/the-looming-student-loan-crisis9. Forbes, December 14, 2012, "Student Loan Crisis Solved?Next Problem?" by Raj Sabhlok. ⓒ 2012 by Forbes.com LLC. All rights reserved. http://www.forbes.com/sites/rajsabhlok/2012/12/14/student-loan-crisis-solved-next-problem/10. CNN News, December 6, 2012, "The Looming Crisis of Student Loan Debt," by William J. Bennett. 2012 by Cable News Network. All rights reserved. http://www.cnn.com/2012/12/06/opinion/bennett-student-debt11. Ibid.12. The American, May 14, 2013, "The Looming Student Loan Crisis," by Jackson Toby. ⓒ 2013 by the American Enterprise Institute. All rights reserved. http://american.com/archive/2013/may/the-looming-student-loan-crisis13. Fox Business, March 13, 2013, "Real World Impacts of Growing Student Loan Debt," by Kate Rogers. ⓒ 2013 by Fox News Network LLC. All rights reserved. http://www.foxbusiness.com/personal-finance/2013/03/14/real-estate-market-and-college-debt-holding-back/14. Ibid.15. Ibid.16. Ibid.17. American Thinker, March 29, 2013, "Student Loan Crisis Getting Worse," by Rick Moran. 2013 by American Thinker. All rights reserved. http://www.americanthinker.com/blog/2013/03/student_loan_crisis_getting_worse.html18. Yahoo! Finance, May 7, 2013, "Only 150 of 3500 U.S. Colleges Are Worth the Investment: Former Secretary of Education," by Lauren Lyster. ⓒ 2013 by Daily Ticker and Yahoo! Inc. All rights reserved. http://finance.yahoo.com/blogs/daily-ticker/only-150-3500-u-colleges-worth-investment-former-132020890.html19. To see the complete list of colleges and their rankings, visit: http://www.payscale.com/college-education-value-2013
