Category Archives: Federal Reserve Bank of St. Louis

Solving the Student Debt Problem

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I have devoted several posts recently, here, here, and here, to discussing the rapidly increasing costs of higher education (see chart below) and the corresponding rapid rise of student debt.
Capture7Here are the basic facts:

  • There are too few college graduates in the U.S. At least ten OECD countries have a higher percentage of college graduates than we do.
  • America is graduating inequality. College degree attainment has increased between 1970 and 2011 for all income groups; however this is happening much more quickly for higher income groups.
  • Not all college degrees are created equal. Students at private, nonprofit institutions graduate at higher rates, and with lower debt, than students from public institutions who, in turn, graduate at higher rates and with lower debt, than students from for-profit institutions.
  • The Federal Reserve Bank of New York has found a close connection between subsidized loan and Pell Grant limits and the increase in college tuition costs.
  • The Federal Reserve Bank of St. Louis has found that “white and Asian college grads do much better than their counterparts without degrees, while college-grad Hispanics and blacks do much worse proportionately.”
  • The percentage of student borrowers at for-profit as well as community colleges who default on their loans has greatly increased since the year 2000 (see below)
    Capture1In other words, our current federal student loan program is not only driving up college costs for everyone but is also creating a huge financial burden for the very low-income students who are most in need of financial aid to succeed in college.
    The way to respond to this is to put strict lids on the amount of subsidized loans available to both undergraduate and graduate students ($30,000 and $60,000 respectively) and, at the same time, use the savings achieved in doing this to increase the size of Pell Grants available for the lowest income students who need the most help.
    Conclusion: our high-tech society needs more college trained workers and we should especially encourage capable low-income young people to go to college. We could also do a much better job of targeting Pell grants instead of loans to this group of students.

Minorities and Higher Education: a Severe Dilemma

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In two recent posts, here and here, I have established that:

  • Rapid increases in federal student aid in recent years have led to tuition increases at both public and private educational institutions and for both undergraduate and graduate students.
  • American higher education is increasing the divide between the haves and the have-nots in the sense that college degree attainment is increasing much faster for those students from higher income families.
  • Furthermore, students at private, nonprofit (most prestigious) institutions have higher graduation rates and lower debt levels compared to students from public institutions who, in turn, have both higher graduation rates and lower debt levels than students at for-profit colleges (least prestigious).Capture

As if this isn’t bad enough, it gets even worse! The Federal Reserve Bank of St. Louis has just reported, “Why Didn’t Higher Education Protect Hispanic and Black Wealth?” that “White and Asian college grads do much better than their counterparts without college, while college-grad Hispanics and blacks do much worse proportionately.” (see above chart).
In short, the federal government is spending more and more money on higher education, which, in turn, is making colleges and universities more and more expensive. Whites and Asians from higher-income families are graduating in much higher numbers and with minimal debt, while college-grad blacks and Hispanics are mired in huge levels of debt.
How should society address this severe inequality in higher education?

  • Federal student loans should be limited to $30,000 for undergraduates and $60,000 for graduate students, the average amounts borrowed today for each category of student. Beyond these limits, students could still borrow from the private market, but with no subsidies or loan guarantees provided by the government. This single action alone will help to hold down college costs.
  • All students, and especially those from low-income families, should be encouraged to avoid excessive college debt. There are many high quality, low-cost educational institutions all around the country (e.g. UNOmaha where I teach) to meet their needs. It should be strongly emphasized that an expensive, prestigious institution is not needed to obtain a good education.