The Student Debt Crisis
His life changed on graduation day, however, when private equity titan Robert Smith announced he would pay off the student loans of all 400 hundred graduates. An enormous burden had been lifted. While we can take pleasure in Roberson’s story, most students won’t have their debts erased by billionaires.
Americans owe more than $1.56 trillion in student loans, about 50 percent more than total credit card debt. Nearly 70 percent of the class of 2018 took out student loans, at an average of roughly $30,000.
Presidential contender Bernie Sanders recently tweeted out his concerns:
3,800%.— Bernie Sanders (@BernieSanders) May 16, 2019
That's how much the cost of four-year public college has increased since 1964.
In that time, how many bright young people gave up the chance at a college education because they couldn't afford it?
We will make public colleges and universities tuition-free.
The Vermont senator is not wrong about surging costs (though he ignores inflation, skewing his analysis), yet he overlooks the fact that it was federal policy in the first place that encouraged countless students to pursue degrees they could not afford.
The Higher Education Act of 1965 directed taxpayer dollars to low-interest loans for students pursuing college. Though the program started small, today roughly 90 percent of all student loans are issued by the government—the Department of Education now oversees $1.3 trillion in debt.
Some graduates are unlikely to ever pay back these loans. Simon Galperin has $235,000 in student debt and makes monthly payments of less than $50. He’s not even covering the interest, meaning his total debt keeps growing.
And Federal Reverse data show nearly 20 percent of students who took out loans are in default or nearing delinquency, triple the rate of mortgage loans. Meanwhile, the Brookings Institution predicts up to 40 percent of students who enrolled in college in the 2000s could be in default by 2023.
To these desperate borrowers, proposals by Sanders and fellow presidential contender Elizabeth Warren to abolish or forgive student debt understandably seem tempting. Offering what feels like “free money” to young people with little experience managing their finances results in economically irrational behaviors.Warren has proposed moving $50,000 in student debt (per household earning less than $100,000) onto taxpayers. Sanders one-upped Warren, unveiling a proposal to shift the entire $1.6 trillion tab in an effort “erase” the debt.
Such moves subsidize Americans who attended college with the wages of those who didn’t. Bureau of Labor Statistics data show that educated Americans—even those who failed to graduate—have greater earning potential than those who did not attend college. Sanders’ plan pays off the loans of the future upper class. This would have unforeseen consequences.
In their bestselling book Freakonomics, authors Steven Levitt and Stephen Dubner describe the power of economic incentives—pressures to behave in a certain way—calling them “the key to solving just about any riddle.”
Offering what feels like “free money” to young people with little experience managing their finances results in economically irrational behaviors. Students can pursue loans without knowing whether the degree they earn will allow them to pay off future debts.
Federal loans have made tuition far more expensive. Universities get paid up front—so whether students graduate, drop out, or default on the loan doesn’t matter. Departing students are easily replaced. Confident that students have access to cheap money (which can be expensive in the long run), colleges have no incentive to control or cut back the prices of housing, tuition, fees, and meals.
Instead of erasing student debt, we should address the twisted incentives that cause it. Students are beginning to recognize that four-year degrees don’t always pay off, and are opting for alternatives: apprenticeships, entrepreneurial programs, and coding camps.
If universities themselves offered loans, incentives would push them toward controlling costs and maximizing student success after graduation.
We should also encourage cost-benefit thinking. Not all student debt is equal. If borrowing $75,000 helps you graduate medical school, that debt measurably increases your earnings even after it’s paid off. But borrowing against a degree in social work, where median earnings are less than $50,000, is much riskier.
The best solution is to get the federal government out of the loan business altogether.
If universities themselves offered loans, incentives would push them toward controlling costs and maximizing student success after graduation. Another option is income share agreements, which allow potential employers or independent organizations to pay tuition in exchange for a percentage of the students’ future earnings. The concept, pioneered by economist Milton Friedman is increasingly popular, especially in Latin America.
The practices would return education to better economic incentives, resulting in far fewer sad debt stories. Better incentives align the interests of educators, employers, students, and parents, and let taxpayers (especially those who didn’t have the chance to attend college) off the hook for others’ choices.
The student debt crisis should remind us of the painful consequences of interfering with incentives to manipulate others’ choices.
When markets seem to falter—recent, painful examples include the student loan bubble and housing crisis—the culprit is often government intervening in a way that warps incentives. When we try to modify or ‘"improve" others’ choices without understanding the relevant pressures, those efforts often backfire.
So the student debt crisis should remind us of the painful consequences of interfering with incentives to manipulate others’ choices. By stripping away responsibility, we may have destroyed opportunity.