Glenn Reynolds on the Immorality of the Student Debt

Glenn Reynolds on the Immorality of the Student Debt

Postby admin » Tue Nov 05, 2013 3:40 am

Glenn Reynolds on the immorality of the student debt explosion, administrative bloat, and higher education bubble

Mark J. Perry | June 28, 2013, 5:11 pm

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Glenn Reynolds writes in today’s WSJ about the immorality of the student debt explosion and the related higher education bubble:

Student debt, which recently surpassed the trillion-dollar level in the US, is now a major burden on graduates, a burden that is often not offset by increased earnings from a college degree in say, race and gender issues, rather than engineering.

According to a 2012 analysis of college graduates 25 and younger, 50% are either unemployed or in jobs that don’t require a college degree. Then there are the large numbers who don’t graduate at all, and the more than 40% of full-time students at four-year institutions who fail to graduate within six years, and the almost 75% of community-college students who fail to graduate within three years. Those students don’t have degrees, but they often still have debt.

Why do students have so much debt? According to a recent study by Mark Perry, a professor of economics and finance at the University of Michigan at Flint, between 1978 and 2011 college tuition in the U.S. increased at an annual rate of 7.45% (see chart above), vastly exceeding the rate of inflation [3.8% over that period] and the almost-stagnant rate of growth in family incomes. (MP: And greatly exceeding in the average annual 5.8% increase in medical care and the average annual 4.3% increase in new home prices from 1978 and 2011).

The difference has been made up by more and more debt. With costs above $60,000 a year for many private schools, and out-of-state costs at many state schools exceeding $40,000, some young people are graduating with student loan debts of $100,000 or more. A recent study found that 70% of the class of 2013 is graduating with college-related debt—averaging $35,200.

According to a recent New York Federal Reserve study, “the share of twenty-five-year-olds with student debt has increased from just 25% in 2003 to 43% in 2012″ and “student loan delinquencies have also been growing.” Almost 12% of student loans are more than 90 days overdue. Student-loan debt also delays marriage, home purchases and other “adult” decisions that once followed graduation from college.

Now here’s where the real immorality kicks in. The skyrocketing cost of a college education is a classic unintended consequence of government intervention. Colleges have responded to the availability of easy federal money by doing what subsidized industries generally do: Raising prices to capture the subsidy. Sold as a tool to help students cope with rising college costs, student loans have instead been a major contributor to the problem.

In truth, America’s student loan problem won’t be solved by low interest rates—for many students, the debt would be crippling even if the interest rate were zero. If we want to solve the very real problem of excessive student-loan debt, college costs need to be brought under control. A 2010 study by the Goldwater Institute identified “administrative bloat” as a leading reason for higher costs. The study found that many American universities now have more salaried administrators than teaching faculty.

Another way to approach costs is to remove the incentives for universities to accept government-subsidized student-loan money regardless of a student’s prospects of graduation or gainful employment. Under the current setup, incentives run the other way: Schools get their money up front via student loans; if students are unable to pay the loans back, the burden typically falls on taxpayers, and the students themselves, while the schools get off scot-free.

A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. I would favor allowing students who can’t pay to discharge their loan balances in bankruptcy after a reasonable time—say, five to seven years, maybe even 10—with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance.

You can bet that under this kind of a rule, universities would be much more careful about encouraging students to take on significant debt unless they are fully committed first to graduating, and second to a realistic career path that would enable them to service that debt over time. At the very least, schools would be more likely to warn students of the risks.

Even thinking about the impact of such a “skin in the game” rule for colleges helps to illustrate the irresponsible—even, in Elizabeth Warren’s words, “immoral”—way that colleges up to now have dealt with costs and with debt. If lawmakers were serious about helping students pay for college, Congress would be considering more than simply continuing low interest rates on ever-higher student-loan balances.
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