In pursuing a college education, over 40 million Americans have gone into debt. These Americans owe about $1.3 trillion on student loans, averaging nearly $30,000 per borrower. To be sure, that average is inflated by graduate and professional students who often have obligations exceeding $100,000. But typical borrowing for undergraduate degrees is still substantial, and Americans owe more on student loans than on credit cards or automobile borrowing. In some cases, young Americans have delayed marrying, having children and purchasing a house because of the large student loan debt burden.
Ironically, well intentioned legislation that created guaranteed federally subsidized student loans a half century ago has also contributed to the problems that make the debt problem so large today. The rate of college tuition fee inflation has been significantly greater since the late 1970s (when the loan programs became a major financing source) than in the decades before. If tuition fees had risen at the same percentage rate from 1978 to today as they did from 1940 to 1978, they would now be only about half as high as they actually are – and the need to borrow large amounts would be vastly lessened.
Ironically, well intentioned legislation that created guaranteed federally subsidized student loans a half century ago has also contributed to the problems that make the debt problem so large today.
Some politicians, such as President Obama, Bernie Sanders, Elizabeth Warren, and Hillary Clinton, have proposed to ease the problem by lowering interest rates on the debt to near zero, forgiving parts of student debt, or making college free altogether. These proposals do not deal with the root cause – high and rising tuition fees – and unfairly treat those who have sacrificed hard to pay back their loans. Moreover, they create what economists call a “moral hazard” problem: if borrowers think the government will forgive or reduce their debt, they will borrow more and make fewer payments on their loans. This in turn would add to an already dismal federal fiscal situation – a situation in which a nation that is nearly seven years into a recovery from an economic downturn still runs large budget deficits that ultimately weaken the nation and imperil future generations.
As attractive as they sound, the “free college” proposals being put forward do not solve the debt problems of the tens of millions of past borrowers. Moreover, they give “free” education to millions of fairly to very affluent Americans who can easily pay tuition fees. The primary beneficiaries of college degrees are the recipients, who get better jobs as a consequence of their education. Why shouldn’t they pay for at least some of their education?
The long run solution to the student debt crisis must involve moderating the rate of tuition price inflation. As former Education Secretary Bill Bennett opined nearly 30 years ago, the current student loan programs incentivize colleges to raise tuition fees more aggressively than they otherwise would, turning the colleges – not the students – into the real beneficiaries of the loan programs. Recent studies published by the New York Federal Reserve Bank and the National Bureau of Economic Research affirm the basic truth of the Bennett Hypothesis. The colleges, in turn, use the higher tuition fee revenues to fund an academic arms race that includes vastly expanded administrative bureaucracies, elaborate student recreational facilities, million dollar salaries for university presidents, etc.
What should Congress do? Three things come to mind. First, policymakers need to significantly modify the current lending and related (e.g., tax credit) programs – perhaps ultimately even phasing them out in order to reduce the upward pressure on fees that these programs provide. More severe time limits on the number of years of eligible lending are also probably needed, for example, and loans to parents of students probably should stop, as perhaps should tuition tax credits. Colleges should not be able to use student loans to raise fees indiscriminately.
The long run solution to the student debt crisis must involve moderating the rate of tuition price inflation.
Second, colleges should have “skin in the game.” The schools admit students who in many cases are ill equipped for college, yet they suffer no consequences when students default on their loans. If the colleges faced some of their financial consequences of their decisions, perhaps they would lead fewer students into the despair from being college dropouts (or low paying graduates) on the one hand, and deep in debt on the other.
Another idea that would cost the taxpayers absolutely nothing deserves a try: Income Share Agreements (ISAs). Students would sell equity in themselves – receiving funds from private investors to help cover college expenses in return for paying those investors a share of their post-college earnings. The risks of financing college would be passed from students with little financial acumen to experienced investors. The terms of ISAs would inform students, legislators, and college donors which colleges provide a high return of college investments, and which majors are valued in the marketplace. Some modest changes in federal legislation assuring that ISA contractual terms are enforceable probably would also be needed.
The bottom line is that we face a student loan crisis in America. It is a crisis that Congress helped to create. It is also one they must now help to end. Doing so will not only remove a financial burden being placed on millions of families, but it will also provide young people with one less obstacle to overcome in life.
Richard K. Vedder, Ph.D., is the Director of the Center for College Affordability and Productivity. He also serves as Professor emeritus at Ohio University and Adjunct Scholar at the American Enterprise Institute.