College Costs and Student Debt

 

Student debt is a huge problem, see here and here, both for the college students and former students who have accumulated it as well as for the U.S. Government which has to carry the debt. I see this as a three-part problem which American society has to deal with:

  • As illustrated in the first chart, the cost of higher education has been rising very fast in recent years, even faster than the cost of health care, which in turn is increasing faster than the underlying rate of inflation.capture35
  • Since 1996 outstanding student loans have risen from $200 billion to $1.3 trillion.
  • The highest default rates on student loans occur at community colleges (23% in 2012) and for profit colleges (18%). Worst hurt are the low-income and minority students who never graduate but still have unpaid debt (see the second chart).capture36

For the federal government to increase subsidized loan limits or to establish a broad-based free tuition program will only encourage educational institutions to keep raising their prices.
A much better approach is needed as follows:

  • Faster economic growth would help immensely. Our 2% average annual growth rate since the end of the Great Recession in 2009 is simply too slow to create more jobs and higher paying jobs (which makes it easier for students to pay back their debt).
  • At the federal level the emphasis should be on putting more money into Pell grants for the neediest students, paid for by cutting back on non-need based aid.
  • At the state level the emphasis should be on making the two-year associate degree free for all students who pursue it. Tennessee started such a program, Tennessee Promise, in 2014, Oregon in 2016. The goal here is for many more students who try postsecondary education to end up with a degree or certificate of some sort.

Conclusion. There are positive and efficient steps which can be taken to alleviate the student debt problem for the hardest hit low-income students without aggravating the overall problem of rapidly increasing college costs.

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Solving the Student Debt Problem?

 

Today’s New York Times has an excellent article by Kevin Carey on the current status of federal student loans, “A Quiet Revolution is Helping Lift the Burden of Student Debt.” Our current system, called Income-Based Repayment, allows former students to repay their college loans, on a monthly basis, at a rate of 10% of net income, after deducting basic living expenses.  It forgives all loan balances after 20 years, reduced to only 10 years for people who work for government or non-profits.  As shown in the chart below, participation in the IBR program is increasing rapidly.
CaptureMr. Carey shows by example, that the IBR program is quite generous to low paid workers.  Take a teacher who borrows the national average of $29,000 for a bachelor’s degree and another $13,000 for a master’s degree and then takes a teaching job starting at $35,000 and paying $50,000 ten years later.  The teacher’s monthly payments will start at $117 and rise to about $200 in the tenth year.  The teacher will pay back a total of $18,360 and be forgiven the remainder of $48,840 of principal and interest after 10 years.
It makes sense to subsidize college education for teachers and others who work in low wage occupations.  The problem, of course, is that it is very expensive to do so.  The federal government is now committing over $100 billion each year to student loans.  There is over $1 trillion in outstanding federal student loan debt.
Many people have pointed out that our very generous student loan program is subsidizing the rapidly increasing cost of American higher education.  Here are two specific ways to address this problem:

  • Put limits on the amount of money an individual can borrow for college expenses. One such suggestion, from the political scientist, Peter Salins, would set the maximum value of a loan at 50% of the full prevailing average cost of educating undergraduates at U.S. public colleges.
  • Require all colleges to cover 20% of a defaulting student’s loan out of their own pockets. Sheila Bair makes this suggestion for for-profit colleges only but it should apply to all colleges, public and private as well as for-profit.

There are lots of low-cost and high quality educational institutions around the country, including the University of Nebraska at Omaha where I work!  Both students (and their families), as well as the colleges they attend, need to have higher stakes in limiting the explosive costs of higher education.