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.
- 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).
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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Several months ago I discussed “How the American Education System Contributes to Inequality.” It so happens that students from high-income families graduate from college in much greater numbers and also with much less debt, compared with students from low-income families.
A new study from the New York Federal Reserve has found a connection between a rapid increase in student aid in recent years and the rapid increase in college costs. In particular:
- A $1 increase in the subsidized loan cap leads to a tuition increase of 65 cents, and
- A $1 increase in the Pell Grant limit leads to a tuition increase of 55 cents.
- Furthermore, private schools, both nonprofit and for-profit, are bigger offenders than public schools, even though declining state subsidies for higher education primarily affect public universities.
- At the present time undergraduates can borrow a maximum of $57,500 from the federal government.
- Under the decade-old Grad Plus program, graduate students can borrow any amount their school charges. In the seven years before Grad Plus, undergraduate tuition was rising faster than grad school costs. In the seven years after, the reverse occurred.
Clearly this is an untenable situation. The solution, in my opinion, is to strictly limit the total amount of federal loans for both undergraduate and graduate students and force schools to compete on price. For example:
- Limit the total amount borrowable by an undergraduate, from the federal government, to $30,000, the average amount borrowed today, and then let it adjust it each year for inflation.
- Limit the total amount borrowable by a graduate student to $60,000, the average amount borrowed today, adjustable each year by inflation.
- Students who want to borrow additional funds may do so on the private market, with no subsidies or guarantees provided by the federal government.
Such a program would provide much needed financial discipline to colleges and universities and reduce and stabilize ballooning student loan costs for the federal government.