June 28 2013
Is Your College Loan Worth It?
Congress has been debating what to do about student loan interest rates.
But perhaps they aren’t getting to the heart of the matter. Glenn Reynolds, a university professor when he is not blogging, does in a must-read piece in today’s Wall Street Journal: it is a moral issue. Reynolds writes:
In the student-loan world, there's immorality to spare—not in the still historically low interest rates, but in the principal of the thing. Student debt, which recently surpassed the trillion-dollar level in the U.S., is now a major burden on graduates, a burden that is often not offset by increased earnings from a college degree in say, race and gender issues, rather than engineering.
Reynolds cites an Associated Press analysis last year that half of college graduates 25 and younger are either not employed or working at jobs that don’t require a college degree. Other students have failed to graduate but still have college loans for the time they were enrolled.
College tuition, meanwhile, has risen. Economics professor Mark Perry found that between 1978 and 2011 college tuition went up 7.5 percent—vastly outstripping the rate of inflation and growth in family incomes. This is one reason students have taken on more and more debt. A recent study by Fidelity Investments found that 70 percent of the class of 2013 is emerging from college with college-related debt. The average debt is $35,2000.
Now here's where the real immorality kicks in. The skyrocketing cost of a college education is a classic unintended consequence of government intervention. Colleges have responded to the availability of easy federal money by doing what subsidized industries generally do: Raising prices to capture the subsidy. Sold as a tool to help students cope with rising college costs, student loans have instead been a major contributor to the problem.
In truth, America's student loan problem won't be solved by low interest rates—for many students, the debt would be crippling even if the interest rate were zero.
If we want to solve the very real problem of excessive student-loan debt, college costs need to be brought under control. A 2010 study by the Goldwater Institute identified "administrative bloat" as a leading reason for higher costs. The study found that many American universities now have more salaried administrators than teaching faculty.
One of Reynolds’s solutions is for schools to decline to take government-subsidized student loan money from students who aren’t likely to graduate. This comes under the heading of: You Mean They Aren’t Already Doing That?
Reynolds suggests that schools should be on the hook for a percentage of the money loaned to students who don’t graduate. Schools would then be more careful about taking money from students whose prospects are not good but whom the school may currently be tempted to view as cash cows.
Can you imagine the cries of hard-hearted that would arise if Congress were debating such measures instead of merely trying to fiddle with interest loan rates? But it would prevent a lot of young people from taking on needless debt.