President Obama and Congress are squabbling again – this time over the rates charged on federal college loans.
Surrounded by students nicely turned out in suits and dresses, looking more like the Mormon Youth Chorus than today’s undergraduates, Mr. Obama recently chastised Congress for not yet blocking a doubling of rates for new Stafford loans set to occur on July 1.
As the president well knows, the House has already passed a bill preventing the hike and tying new loan terms to market levels. The president’s solution is similar, but would lock in rates for the duration of the loan. The spat is like bickering over menu choices on the Titanic.
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Between 2000 and 2010, the number of students enrolling in degree-conferring institutions increased 34 percent. The portion receiving federal aid skyrocketed from 31.6 percent to 47.8 percent, and the average award nearly doubled. In addition, the percentage taking out student loans climbed from 40.1 percent to 50.1 percent, and the average borrowing rose 76 percent.
The ramp-up in loans to students has not only driven up costs but has undermined the value of a college degree. Some 30 percent of people ages 25 to 29 are college graduates today, up from 12 percent in the 1970s. That is a notable achievement, unless the degrees awarded do not satisfy the needs of the job market. Richard Vedder, economics professor at Ohio University, has written that we have one million retail sales clerks and 115,000 janitors with college diplomas. At the same time, one fifth of the country’s managers say they can’t find skilled workers to fill job openings. Something is not right.
Rising student debt is a menace--not just to the families involved but also to the economic recovery. As with housing, the government’s well-intentioned effort to make advanced education available to all has led to crippling borrowing by millions of Americans. As with housing policy, it is time for a clear-headed review of how we can promote sensible spending on advanced education. That might start with challenging why Congress – or the president – should be responsible for fixing student loan rates in the first place.
Many of the problems challenging our higher education system could be resolved, or might have been prevented, by allowing greater input from the marketplace. The government’s 2010 take-over of student lending and prior 45 years of subsidizing student borrowings threw rational credit analysis out the window. A family’s earnings and debt profile were reviewed, but the applicant’s potential earning power was not part of the equation.
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Lenders with skin in the game might have analyzed the income prospects of young people in different fields of study, and channeled more money to pre-med or software design than to philosophy or journalism majors, for instance. President Obama has long bemoaned our shortage of STEM grads. In a more rational world, higher income in engineering and tech would have attracted more students (and lenders) to those fields.
Many will argue that seeking a college degree is not just about financial returns. Lawmakers, however, have long used economics to persuade taxpayers to underwrite our colleges and universities. We are told we cannot compete in a global economy without a highly educated workforce. That is true, but it has become clear that not all training is the same.
To date, lawmakers concerned about rising student debt have focused scrutiny on for-profit schools, which have been plagued by high costs and failure rates. They should be looking at the whole system.
While household debt has been declining gradually during the recession, student borrowings have increased – rising another $20 billion in the latest quarter. Some 43 percent of twenty-five-year-olds owe student debt today, up from 25 percent in 2003. Between 2003 and 2012, the average student loan balance increased 91 percent, from $10,649 to $20,326.
The rise in student debt– now at $986 billion, triple the level outstanding in 2004 – has held back the recovery, and especially the housing and auto markets. Though student loans make up only 9 percent of total household borrowings, they are mainly held by young people – who are essential to new household formations. The average age of the first-time home buyer is 30, and most borrow to finance their purchase.
A study by the New York Fed shows that historically, most first-time home buyers have student debt – they are typically higher up the income scale and better able to finance a home. However, during the recovery, home buying by people holding student debt took a nosedive. Similarly, people saddled with student debt were less likely to borrow to buy a car. In short, rising student debt pushed out other consumer loans.
Partly, this trend is explained by a tightening of credit standards. The Fed study shows that while in the past scores were not much impacted by student borrowings, during the recession that changed. By 2012, the average credit score for a 25-year old without student debt was 15 points higher than the counterpart who took out college loans; for those aged thirty, the gap was 24 points. The Fed study concludes that while “highly skilled young workers” have always been a boon to the economy, “unprecedented student debt may dampen their influence in today’s marketplace.”
Families are wising up to the “value proposition” of a college degree, checking out websites like CollegeRealityCheck.com to compare future earnings and real costs. The Obama administration has also acknowledged the need for more discriminating choices, while still pushing broader college enrollment.
The biggest reform of all, and the only one that might restore sanity and discipline to our higher education system, is to return student lending to the private sector – this time without the carte blanche of federal guarantees. To give low-income families a shot at attending college, direct grants awarded by scholastic merit would be, in the end, a less distorting approach.
Most likely, Congress will extend today’s Stafford loan rate for another year, and that pile of cans down the road will continue to build.