A number of friends and acquaintances have been alarmed by rising student loan debt, which stands at $850 billion vs. $828 billion in credit card debt. As skeptical as I am about traditional higher education, I don’t see this as a pressing problem. A priori, it strikes me as healthy that we have more student loan debt than credit card debt, though we can have a legitimate debate regarding how much of education spending represents consumption rather than investment per se. AEI’s Rick Hess has written a column for The Daily on why we shouldn’t be alarmed.

(1) The debt levels are modest:

The Project on Student Debt reports that nationally, the average debt for those graduating seniors who have taken out loans was $23,200 in 2008. The payment for loans of that size is typically a couple hundred bucks a month, or about what recent grads will be spending monthly on cable and cell service. That’s up, at a pace of about 6 percent a year, from $18,650 in 2004. And about one-third of students graduate with no loans at all; they’re not included in these debt figures.

(2) Most students attend public institutions that offer decent value for money:

In 2010, the College Board reported that annual tuition and fees averaged $2,713 at two-year colleges, $7,605 at public four-year colleges for in-state students and $11,990 at public four-year schools for out-of-state students. It is the cushy private four-years, with average tuition and fees of $27,293, that make college seem so expensive. And it is only a relatively privileged minority that attends these private institutions.
The National Center for Education Statistics estimates that just 26 percent of the nation’s 19.1 million two- and four-year college students are attending private institutions.

And the value for money part reflects the wage premium for graduates:

PayScale/Business Week has reported that college graduates can expect to out-earn high school graduates by more than $1.2 million over their working life. Those with professional degrees can expect to out-earn high school dropouts by more than $3.5 million. Even the most cautious estimate of average net return on investment was a lifetime gain in earnings of $627,239. College pays off big for graduates.

(3) Then there is the extent of public subsidies:

In 2007, state and local governments contributed $83.5 billion to fund public two- and four-year institutions. That amounted to more than $6,700 per full-time student. The federal government offers an additional $40 billion in grants, as well as about a $100 billion in subsidized loans. All of these amounts have increased steadily over time. Reasonable rates of student borrowing can best be understood as students contributing to an education that is likely to pay off handsomely, and shouldering some of the burden if they choose to attend pricey private institutions.

This is an astounding sum of money. Is it being allocated in a cost-effective manner? I doubt it. My guess is that we’re seeing something like a Medicare FFS effect, in which we pay for procedures (certain kinds of instruction) rather than outcomes.

Hess ends his column on a cautionary note: heavy debt loads are a particularly bad deal for students who don’t finish a degree, and the incentives for controlling costs are very weak:

Indeed, middle-class families often stretch to send their children to the most expensive college they can afford — with little means of judging whether the additional bucks are being well-spent. It is this mind-set, and not the modest levels of student borrowing, that most urgently demands attention.

Greater transparency regarding outcomes would help parents and students make decisions, and it would help the public sector channel resources more effectively as well.

I also enthusiastically recommend “The Case for Being Bold,” a document Hess co-authored with Andrew P. Kelly and Olivia Meeks for the Institute for a Competitive Workforce, a project of the U.S. Chamber of Commerce. The report offers a broad, accessible overview of themes that Hess, Kelly, and Meeks have raised in the past, and it thus serves as an excellent introduction to their distinctive take on reforming K-12.