Solving the Student Debt Problem


I have devoted several posts recently, herehere, 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.

Do We Need a New School of Economics?


“Consider the following scenario. You are an airline pilot charged with flying a planeload of passengers across the Atlantic. You are offered the choice of two different aircraft. The first aircraft has been prepared by chief engineer Keynes and the second by chief engineer Hayek.
You have to choose which plane to use, so naturally you ask the advice of the two engineers. Keynes urges you to use his aircraft, offering a convincing explanation of why Hayek’s plane will crash on take-off. Hayek urges you to use his aircraft, offering an equally convincing explanation of why Keynes’s plane will crash on landing.

At loss as to which plane to choose, you seek the advice of two leading independent experts – Karl Marx and Adam Smith. Marx assures you that it does not matter which aircraft you choose as both will inevitably suffer catastrophic failure. Similarly, Smith also reassures you that it does not matter which aircraft you choose, as long as you allow your chosen craft to fly itself.”
Thus begins a fascinating new book, “Money, Blood and Revolution: How Darwin and the doctor of King Charles I could turn economics into a true science,” by the fund manager and economist, George Cooper.
CaptureMr. Cooper sets up a circulatory model of democratic capitalism whereby rent, interest payments and profits flow from low income people at the bottom of the pyramid to the wealthy at the top. And then tax revenue (collected mostly from the wealthy) is redistributed downward in the form of government programs.
According to Mr. Cooper, the financial crisis was caused by a combination of lax regulation and excessive credit and monetary stimulus. The question is what to do about it. Mr. Cooper says:

  • Stop adding to the problem. High student debt and high mortgage debt are still being supported by government programs.
  • Change the course of the monetary river. Quantitative easing does not work because it just puts money into the hands of the wealthy and they have no incentive to spend it.
  • Change the course of the fiscal river. Instead put money into the hands of the people at the bottom of the pyramid with expanded government spending on infrastructure (paid for by taxing the wealthy).

Without endorsing all of Mr. Cooper’s suggestions, he nevertheless has many good ones and expresses them in a highly entertaining style!