24 Oct A “Millennial View” on the Student Loan Crisis
We’ve heard a lot recently about the student loan crisis. Politicians running for President are essentially required to have a plan to address it – with Hillary Clinton and Bernie Sanders wanting to spend $350-$500 billion with a B to solve it over four years (plans by Marco Rubio and John Kasich are much less spending-oriented, thankfully).[1]
Most of the discussion has been about what to do about existing debt. The current crisis affects the profitability of the government’s student loan program, which currently generates $50B in revenue. It is likely that some form of forgiveness and/or significant changes to terms of existing loans will be required to make repayment possible – or, if that doesn’t happen, a loss will likely be taken on the loans.
What is less often discussed is why we have a crisis in the first place, and how we can prevent it from happening again.
As MarketWatch pointed out in a September article, most of those who default on their student loans are attending non-traditional schools. Non-traditional in this case means community colleges or for-profit schools like the Art Institutes or University of Phoenixes of the world. 70% of those who started repayment in 2011 and had defaulted by 2013 were at non-traditional schools. [2]
What’s happening to them is that their degrees were not worth what they believed they were. They take out loans they could only afford if their jobs were as good as advertised in the college brochures, and it turns out not to be true. But surely the lenders (the government) should take that into account, and lend less aggressively?
In short, because the lender is the government, loan underwriting standards are not as rigorous as they should be.
First, the government’s role in the student loan crisis so far has probably made it worse – the government has not had sufficient profit incentive to make sure it is making repayable loans. It is a hard thing for a public sector institution to make the decision that certain degrees are ineligible for loans because the job market for those degrees is so weak. By contrast, the 7% of student loans originated by the private sector have to go through an “ability to repay” test and borrowers have to see over 18 different disclosures ensuring they know what they’re signing up for. The results are clear – a MeasureOne report found that only ~2% of private sector student loans were 90 days+ delinquent for Q1 2015, contrasting with 11% of public sector loans. [3]
To make things worse, colleges are sometimes enabled to charge more because the government is providing more and more generous loans; a National Review piece noted: “A recent study by the New York Federal Reserve validated the long-held concerns of many economists and policy analysts alike when it found that ‘on average, for a $1 increase in the subsidized-loan cap, tuitions rose by as much as 65 cents.’[4]”
And to top it off, Democrat plans seem to focus entirely on the cost of education, but not on its value. How do we ensure that people are only able to borrow for college if it is worth it for them, and they’re likely to be able to repay a loan? How do we ensure that people make smart decisions about what degree to get, and from where, to set themselves up for career success?
Ms. Clinton’s plan involves a cut in student loan interest rates not just on existing loans, but also on future ones. As the National Review points out, this exacerbates the problem by making it still easier to borrow money that you may not be able to pay back.[5] Artificially reducing the rate at which students can borrow does not make those loans less risky – a student without a job is still likely to struggle to pay it off.
Bernie Sanders’ plan, which would make college entirely free for anyone who wishes to go, would certainly resolve the debt crisis, while almost certainly creating a new one. The only question is whether his new crisis would be of massive unfunded public spending, under-funded colleges, or a glut of useless degrees students can afford to get because they’re free – or all of the above.
By contrast, my conservative view would say if education has value, people should pay for it at a price determined by how much that particular education is worth.
The best role the government could play, in the free market model, is to enable a free market with closer to perfect information about what education is worth. This means it should help potential student borrowers get verified data on joblessness rates and starting salaries by field at the colleges they are considering and compare it to their loan payments. It would in fact help borrowers to use the same strict “ability to repay” tests and disclosures private lenders are held to, so that they make smart decisions about borrowing – or not.
We are so quick to forget the lessons of the 2008-2009 mortgage crisis, which among other things showed us that combining looser lending standards, lower interest rates, and a separation between lenders and the people urging borrowers to borrow (in this case, the colleges) can lead to disaster. Let’s not repeat that mistake.
S.E.M, Los Angeles
[1] http://www.nytimes.com/2015/08/14/us/with-350-billion-plan-hillary-clinton-prods-rivals-on-student-debt.html?smid=nytcore-ipad-share&smprod=nytcore-ipad&_r=1
[2] http://www.marketwatch.com/story/new-study-spotlights-the-real-student-debt-crisis-2015-09-10
[3] http://www.measureone.com/measureone-private-student-loan-report-shows-continued-strong-performance-trends
[4] http://www.nationalreview.com/article/422606/hillary-clinton-student-loan-plan
[5] http://www.nationalreview.com/article/422606/hillary-clinton-student-loan-plan