The Hidden Student Loan Debt Problem

I am not saying that student loan indebtedness should be ignored. It is a problem, but it is less serious than other related problems. It is a symptom of a vicious cycle: State governments have reduced funding for higher education, which pushes tuition higher.
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Much outrage has been expressed over the difficulty U.S. college students and recent graduates are facing because of their student loan debt. Since the recession began in 2008, the amount of student loan debt has spiked by 84 percent, with borrowers owing a record $1.2 trillion. Nearly 40 million Americans have at least one outstanding student loan, according to new research by Experian. But is the problem as dire as some make it out to be?

Today, the average student owes about $28,000 on student loans. That is a big number, but a recent article in Forbes used some comparisons to help put that number into perspective. For example, the average American car loan is $27,000 and purchasing a car does not deliver the high return on investment that a four-year college education does. The U.S. Census Bureau estimates that over an adult's working life, someone with a bachelor's degree can expect to earn nearly an extra million dollars on average compared with someone with only a high school diploma. Similarly, the average home mortgage loan in the U.S. is now over $280,000. Some observers have suggested that student loan debt may prevent young people from purchasing cars or homes and hence is a serious problem. That may be true to some extent, but I argue that the real problem today is wage stagnation, which adds years to when borrowers can pay off their student loans and does much more to limit their opportunities in life.

Please understand that I am not downplaying the hardships of student loan debt or the seriousness of the rising cost of education. A college education has become part of the American dream, right up there with home ownership and apple pie -- and rightly so. Years ago, government programs were created to subsidize student loans to honor the belief in higher education and recent proposals aimed at forgiving or reducing student loan borrowing seem to echo the same sentiment.

Let's review some recent legislation and proposals. A law signed by President George W. Bush to provide forgiveness of student loans for people going into public service for 10 years will begin helping people in 2017. Other officials are working to provide even more support to indebted students. Senator Elizabeth Warren (D-MA) developed the Bank on Students Emergency Loan Refinancing Act, which allows borrowers to refinance their student debt at today's lower interest rates. Such refinancing is already commonplace with mortgages and cars, but has not been easily available in the student loan sector. The Obama administration estimates that the bill has the potential to help 25 million borrowers to save about $2,000 over the lifetime of their loans. Earlier this summer, the bill was blocked in the Senate, primarily because it would require the imposition of new taxes or the loss to the federal government of $60 billion in student loan interest payments over the next decade.

In truth, while the amount of student loan debt is concerning, it's not the most serious problem facing college students and recent graduates. When adjusted for inflation, student loan debt has increased, but, as noted, it is about the size of a car loan on average. While horror stories have been reported about individuals who borrowed massive amounts to finance multiple degrees in fields offering few jobs, that problem is connected to factors beyond the availability of loans. A critical problem today is the stagnation of wages, which makes people take longer to pay back loans. Politicians overlook this and often focus on symptoms of the problem. This diverts attention from the stagnant economy and the reduction of public funding for higher education, which is being felt in many states, including Pennsylvania.

Colleges do play a role in the problem, both for increasing costs so rapidly and for facilitating situations in which students can earn degrees that offer few opportunities in the job market. In an era of global markets, where jobs are often mobile and technology has automated many functions, colleges have not uniformly adjusted their standard model to ensure that students receive adequate preparation for work. While it is fine for university officials to say that they wish to educate students for their career and not their first job, it is imperative for colleges to provide career skills that allow students to find employment by using the critical thinking skills and other attributes provided in a traditional liberal arts education.

It is also essential for colleges to supplement the student experience in ways that enhance the employability of graduates. For example, a recent Gallup study showed that students who have strong relationships with faculty and mentors and have access to experiences that allow them to apply what is discussed in the classrooms (through internships, cooperative education programs, and other real-world and experience-based learning practices) are more successful in their careers and happier in life. Gallup identified six specific attributes and concluded that only three percent of the respondents strongly agreed that they had exposure to all six.

I am not saying that student loan indebtedness should be ignored. It is a problem, but it is less serious than other related problems. It is a symptom of a vicious cycle: State governments have reduced funding for higher education, which pushes tuition higher. Government-guaranteed student loans provide options for students to deal with higher college costs. Colleges use the increased tuition revenue to ensure budgets are met. There is inadequate pressure on colleges to emphasize job placement outcomes. Students and graduates have problems repaying the loans.

We are at a crossroads and must employ different solutions to address student loan debt. For their part, colleges must provide students with the necessary skills to be employable -- even if it requires changing the traditional educational focus by adding career-focused majors in the liberal arts. Government must support higher education through consistent funding and by applying common sense to a variety of government-supported loan programs -- for example, let people consolidate loans and set reasonable caps on the maximum amount that can be borrowed with a government guarantee. Society should recognize that some students will benefit more from a technical education program than a traditional college. Most importantly, government needs to stimulate wage growth, as this will lessen the problems of student loan debt much more effectively than will the creation of new legislation to forgive debt or the creation of new bureaucracies for monitoring colleges.

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