Student Loans: Crisis or Opportunity?
When I was growing up, my parents drilled into me that to get a good job, you needed a college education. That is even more true now, with a bachelor’s degree becoming the minimum standard for many jobs that in years past required only a high school diploma. But of course, part of the increase in demand for bachelor’s degrees is a ballooning of student loan debt (now hovering at approximately $1.2 trillion).
I do think that the fears about student loan debt are exaggerated a little bit; studies show that the average debt students graduate with is $30,000, and that can be amortized fairly quickly once students get a full-time job in their field. Especially when studies show that college graduates earn an average of $2.8 million in their lifetime, an investment of $30,000 seems worth it.
What the numbers don’t reflect, though, are those students who do not graduate (almost 41 percent of those who start college, according to the U.S. Department of Education). For those who spend a significant amount on college and then drop out before they earn their degree, or are unemployable in their field for whatever reason, the debt burden can be significant. And that debt burden affects all of us; adults who acquire significant amounts of debt early in their life have a disproportionate effect on the economy. They are unable to buy houses, tend to put off marriage and having children and spend less (thus hurting the economy) because so much of their disposable income goes to servicing their debt.
So, what started the student debt bubble? What ramifications does that bubble have? And what can we do in higher education to help control costs and make sure that any bubbles that burst do not bring about another Great Recession?
Blowing the Bubble Up
A friend of mine bought a house in 2007. At the time I was envious — it was a nicer house than I could afford, and honestly, I didn’t know how he could afford it. But when I asked, it turns out that he had 100 percent financed the house with an interest-only loan. He’d been approved for a $400,000 mortgage when he had an annual income of only $40,000, and he’d taken full advantage of that mortgage. And he wasn’t the only one; we all know that the housing crisis was precipitated by giving easy money to people with no repercussions. People were given loans based not on what they could afford at the time, but on what their earning potential was perceived to be.
That lending was encouraged by the government, with Fannie Mae and Freddie Mac specifically targeting those who would be turned down for conventional loans by banks. Not that the banks were blameless; loans were repackaged and sold so often that they became more like a shell game of money than loans that were actually tied to people’s ability to pay them back.
Student loans are on the same trajectory. Because student loans are backed by the government, and are not income-based, young adults can take out significant amounts of money based on what their earning potential will be at some point in the future, assuming a number of things go right (they pick a field of study that will lead to a good job, they are able to succeed in their coursework, they are able to get a job in their field, etc.) This government guarantee distorts the natural market forces, meaning more people have access to loans. While this opens the doors to education for a significant proportion of people, it also has created a bubble that many experts worry is unsustainable. And as we all saw with the burst of the housing bubble, that can have ramifications on the economy for years to come.
Although I don’t have proof, my instinct (which is pretty good) tells me deflation is coming. There is a lot of competition in higher education, and people are questioning the value of a degree. All the studies in the world about earning potential will have a hard time combating people’s anecdotes about their cousin’s sister’s friend who has $100,000 in loans and is working in a coffee shop while living with her parents.
Rethinking the Higher Ed Model
Not all hope is lost, though. Learning House’s acquisition of coding bootcamp The Software Guild is giving us a test case into the power of vocational education, and free market forces. The Software Guild is simple: For $10,000, students will learn the fundamentals of coding in only three months (nine if you take the online option). Because federal financial aid does not currently apply to bootcamps, students must finance this education themselves. So why do they choose to spend a good chunk of change with us? Well, because we promise them the ability to get a job at the end. (Note: we do not promise them a job. But we can say that if they successfully complete the program, they will have the skills necessary for entry-level software development jobs.) We track outcomes, we are transparent about what it takes to acquire the skills, and our tuition is upfront — there are no hidden fees or unexpected expenses.
Higher education institutions are going to have to start incorporating these kinds of strategies as well. I keep harping on outcomes, but it’s because I think they are so important. If we are asking people to invest a lot of money in their education, we need to be able to prove to them that it will be worth it. As I said above, a $30,000 loan debt isn’t insurmountable…provided you can get a job that uses your education and pays well. It is up to colleges and universities to prove their value by tracking graduation rates, job placement rates, median salary after graduation and more.
It’s not just college and universities that need to commit to this plan. Accrediting bodies and lenders also need to be more discriminating and hold institutions accountable. We all need to work together to ensure that higher education is bringing value to students, and if it’s not, maybe those programs are not approved for loans, or they have to fight harder to be accredited.
Rethinking the Repayment Model
So, colleges and universities are proving their ROI, students are choosing degrees that will lead to lucrative employment…but still, there is a debt crisis. In addition to the changes proposed above, I also believe we need to rethink our repayment model.
In Australia, the repayment plan is income-based; you pay a percentage of your income for a certain number of years, and then whatever is left is forgiven (in the most simplest terms, of course. There is more to the plan than this, but that is what it boils down to.). This option actually exists in some limited circumstances here in the United States, but many people do not know about it, and it’s not available to everyone (mostly, it’s for teachers and government workers in specific, hard-to-fill industries).
This proposal might seem like it goes against my free market ethos, but in actuality, it’s better for the economy to have an income-based repayment plan. For one, it ensures that people are at least trying to pay back their loans, but it also helps families have enough disposable income to continue keeping our economic engine chugging. If graduates are so busy servicing their debt that they can’t go on vacation, buy a home, or start a family, the economy as a whole will suffer.
And Finally…
I want to be very clear about something: College is not the bad guy here. I know there’s been a lot of chatter about how quickly college costs have risen, but I don’t think colleges are at fault for raising tuition. If people keep paying, which they will because they can get loans that will pay their tuition, then colleges have no incentive to do more with less.
What I do think is this: The current student loan levels are not sustainable, and there need to be drastic changes in the system, from colleges and from the government, to ensure we do not suffer an economic meltdown. I want to strongly encourage the higher education industry to take charge of its own future and start implementing these changes now, before change is forced upon it by external forces, be it regulatory agencies or just the economic pressure of the free market.
How will you handle the change? What do you think we can do to navigate our student loan debt?
