Politics & Policy

The Solution to Student-Loan Debt

Where did we go wrong?

Headlines are proclaiming this week that student-loan debt is rapidly nearing a trillion dollars. Earlier this year, as financial expert Mark Kantrowitz has noted, another landmark was achieved: Student borrowing now exceeds all credit-card debt. While the data here are somewhat murky and questionable, under any accounting they add up to big bucks.

There are three worrisome trends. First, student debt is doubling every seven years or so, growing much faster than credit-card balances, home-mortgage obligations, or commercial loans. At some point, this will become unsustainable as debt burdens overwhelm borrowers’ ability to repay (sounds familiar, doesn’t it?) — particularly when incomes are growing only very slowly, if at all.

#ad#Second, there is a disturbing rise in defaults on student-loan debt; the current rate exceeds 8 percent among the whole population of those who attended four-year schools, but is much higher among various subgroups. If a commercial bank had to write off 8 percent of its loans, it would typically wipe out most of its capital and cause panic among large depositors. Fortunately, even at a trillion dollars, this is only a relatively small portion of total borrowings, so the broader implications of such a high default rate are largely disguised, but this furthers America’s image as a debt-ridden country that cannot meet its obligations.

Third, related to the second point, a large portion of borrowers are in bad financial shape, and the number is growing and will continue to grow. There is no question the truly miserable nature of this “recovery” is a huge culprit, but by no means the only one.

The dirty little secret of higher education is that the nation is turning out vastly more graduates than there are jobs available in the high-paying sectors in which degree holders traditionally have worked: managerial, technical, and professional jobs. One estimate derived from U.S. Bureau of Labor Statistics data says that roughly one in three college graduates today has a job that the BLS classifies as requiring less than a college education.

Thus, we are probably the only nation in the world with nearly 19,000 parking-lot attendants, not to mention 80,000 bartenders and over 300,000 restaurant waiters and waitresses, with bachelor’s degrees. And while a bartender with a bachelor’s in chemistry might be able to make a marginally better Long Island Iced Tea than one with merely a high-school diploma, the financial rewards for that marginal expertise are likely pretty slim.

Here is the way it works in America: High-school guidance counselors, parents, and government officials from President Obama on down tell kids: “You must go to college. The future is in high-technology jobs that require a university degree. We will bribe you to go with low-interest government loans, and if you are fairly poor, you may even qualify for some outright gifts.”

The kids dutifully listen to their parents and mentors. In many cases, earning mediocre grades from less-than-mediocre public high schools makes the kids ill prepared, so 40 percent fail to graduate within six years. Those who persevere and graduate face a bad market (largely because of the poor public-policy decisions of politicians they did not select), but even if they graduated in a period of prosperity, they would be very likely to take a job that is quite different than the one they expected when beginning their higher-education journey.

This is economic and academic child abuse. We have too many people pursuing too many degrees for too little reward. Moreover, the story above ignores critical details — for example, while in college, students do little to enhance their critical thinking or writing skills (if Richard Arum and Josipa Roksa got it right in their groundbreaking book Academically Adrift).

#page#Where did we go wrong? First, by ignoring the point made by social scientist Charles Murray, entrepreneur Peter Thiel, and others: that not everyone is equipped to handle the collegiate environment. True “higher” education should involve studying ideas at a high level of rigor and abstraction, a task for which many people lack the cognitive skills or discipline (in some ways, this takes us back to the problems of our atrocious secondary schooling). Second, we went wrong by ignoring labor-market basics — we still need nurse’s aides, plumbers, long-distance truck drivers, retail cashiers, and, yes, bartenders. For a little while yet, we will even need mail carriers. We should have put various forms of non-degree training on a level playing field with collegiate preparation (e.g., encouraging more kids to pursue the building trades or certificate programs in hair styling). Third, we started a byzantine system of federal financial aid that has had the unintended consequence of creating too many college graduates and has also worked to increase the cost of college attendance. This is overlaid on state-government subsidies for public universities.

#ad#What can be done? We need to intelligently disinvest from higher education. We need to substitute private investments for public ones.

Reform of the current system is a daunting task, given the power and intransigence of faculty members and others spoiled by massive third-party subsidization of their activities. The key to reform lies in three “I” words: information, incentives, and innovation. We need information to expose how little learning is going on, how much research is unproductive, etc. We need to give students and parents incentives to prefer a lower-cost, more efficient system (the for-profits are making big inroads here). If we do these things, innovations will come: Necessity is the mother of invention.

— Richard Vedder is director of the Center for College Affordability and Productivity and an adjunct scholar at the American Enterprise Institute, and he teaches at Ohio University. Andrew Gillen is the research director at the Center for College Affordability and Productivity.

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