With my older daughter heading off to college next year, the question of how much debt is too much debt for her take on is something I’m mulling over quite a bit these days.
How much can you pay, how much will she need to borrow and work, and how much support, if any, can the institution provide?
US Senator Elizabeth Warren has been asking this question, and she is right to raise the issue, given the burden on, as she puts it, their later “economic lives”—buying a house, leasing a car, building some savings, investing, etc.
So what of Senator Warren’s proposal to cut federal borrowing rates from 10 to 4 percent? Her call to wipe out the federal government’s haul of tens of billions of dollars on student loans is right in the very short-term, but there is little to no chance that the proposal can work over the long term.
Before getting into that, I think we should roll the reel of very recent history. Federal policy debates of 2010 vintage swirled around all those terrible private loan originators who enjoyed a federal guarantee. They were making lots of money on students’ backs, we were told, and in order to make student loans work for the end user, we needed to cut the private companies out of the equation.
I have no problem with knocking private companies off of the federal guarantee gravy train, but it was the usual oversold bill of goods we get from the feds these days. We got rid of the so-called “guaranteed loans,” so now it’s the feds’ turn to play bogey man on this issue.
After bad debt losses, and the costs of funds, the feds are making $66 billion profits through their student loans programs.
So, again, by all means, wipe out government profits. But… there’s a problem with this solution. A lot of the feds’ current “profit” is created by borrowing at low short-term rates and lending at high long-term rates. With borrowing rates likely to rise in the coming years, that “profit” is going to be short lived.
I suppose there are a number of small bore actions the federal government could take to help lessen the bite of student loans. Many options have been discussed, including:
- Extending the duration of student loans. Given the size of cumulative loans taken by students, you could create 20-year loans, but I am not sure that does anything to lessen the impact on college attendees’ (not all are graduates!) “economic lives.”
- Allowing students to make prepayments without penalties
- Building on existing income-based rate programs, though that will make crafting the program budget a bit harder.
The problem with Senator Warren’s suggestion and really all of these suggestions is that they do nothing of significance to address the root causes of the hyperinflation exhibited by the higher education market. Moreover, that hyperinflation is in great part driven by the private university and college market, a sector that Senator Warren ignores in calls for the second plank of her college affordability platform—having states and the federal government invest more in public universities and colleges. The hyperinflation is actually driven by a number of market factors including these four:
- Extremely high demand: In 2014, 21 million students went to American colleges and universities, a jump of almost 6 million from 2000. (About 65 percent will attend 4-year colleges, 35 percent 2-year colleges.) So the questions arise: Are we directing too many young people to college? Are we doing enough to offer other alternatives, such as vocational-technical school options? Have we reduced the standards in our K-12 public education system to the point where, to be employable, you really do need a college education? In addition to population growth and the good news of higher percentages of minorities attending college, these above-mentioned factors play a sizeable role in the rising demand for college.
- The kind of demand: Increasingly, students and parents are seeing a college education as a sort of high-water mark in life, a time when unique food offerings and Olympic-style fitness infrastructure are the coin of the realm. This is a cultural change, and one that makes containing costs really hard. Match this kind of demand up with the ever-increasing demand for a college education and you’ve got a pretty steep increase in the price curve as far as the eye can see.
- An outdated organization structure: Universities have inherited some of the worst bureaucratic organizational definitions of any sector out there. Along the way, higher ed has proven to be immune to many innovations, most notably technology, where MOOCs and online learning opportunities have limped along, cordoned off from any integration with the current model of organization inherited from the mid-19th More recently, they have inflated administrative positions (on the upper and lower ends) and become full-service providers to students, including lodging, food, counseling, and health care. Somewhere in the midst of this, I suppose, academic instruction happens. What happens when you have an outdated organizational structure that is protected by ever-rising demand for the service provided? As you might expect, it is a cost structure that is not changing anytime soon. For some in the teaching profession that means starting salaries that are abysmal, as the institutions are leaning more and more on non-tenured academic personnel, in essence, to subsidize the high salaries of tenured faculty. On the tenured side of things, well, the salaries are just fine and untouchable. If you don’t believe me, take a look at the salaries of University of Massachusetts professors and administrators—who routinely rank among the highest paid state employees.
- The cost of compliance with federal and state rules: The obsolete structure of most higher education institutions is only exacerbated by all the federal rules that apply to public and private universities alike. The rules just embed the worst habits, and they have a significant cost impact as can be seen by the price points for colleges, such as Hillsdale College, which are somewhat selective (SAT composite 1980, average high school GPA 3.75, admittance rate 43 percent) and offer high-quality instruction. Hillsdale takes no state or federal funds and costs just over $30,000.
We have been waiting a decade already for the higher education sector to face the reality that huge changes are going to come from online course offerings. College and university leaders, and federal and state policymakers are not speeding the change, as they strategize about how to manage themselves to safety in what that new world might look like.
The change cannot happen fast enough.
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