Beating the High Cost of Higher Education and Student Debt

 

This blog addresses America’s too biggest problems:

  • Slow economic growth averaging just 2% since the end of the Great Recession in June 2009. Faster growth means more jobs and better paying jobs.
  • Massive federal debt now 77% of GDP (for the $14 trillion public debt on which we pay interest) and predicted to continue getting worse without a change in policy. As interest rates go back up to normal historical levels the interest payments on this debt will increase greatly and be a huge drag on the federal budget.

As I have reported recently, college costs are growing much faster than healthcare costs which are growing faster than the cost of living in general.  The excessive costs of education and healthcare are, in turn, holding back economic growth.


Regarding the student loan debt problem:

  • For every increased dollar of student aid, college tuition increases 60 cents.
  • Outstanding student loan debt has risen from $200 billion in 1996 to $1.3 trillion today.
  • The highest default rates on student debt occur for community college students (23%) and for-profit college students (18%).

The economist Richard Vedder has made some excellent suggestions for addressing this whole problem:

  • Simplify the entire federal student air system. There should be only two programs, one grant program (Pell grants) and one federal loan program (Plus loans, tuition tax credits, work study, etc.).
  • Give educational vouchers directly to students to empower recipients to weigh costs more closely. These would be strictly limited to low-income students and would be accompanied by modest academic expectations.
  • Require schools to have skin in the game. Schools with abnormally high loan delinquency rates should have to pay a tuition “tax” to the government to help cover costs.

Conclusion. “Financial aid has caused tuition to skyrocket. If we can’t abolish it, we can at least simplify it.”

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The College Education Bubble

 

A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.