The Problem With Student Debt

What seems to bother Jason Delisle about the explosion in educational debt is the possibility that borrowers might defer repaying their debts or default on them entirely:

It is time to re-evaluate how we measure the performance of student-loan programs—particularly whether borrowers are or are not meeting their obligations. The traditional measures of nonrepayment—delinquencies and defaults—might be fine for most types of loans, but not for outstanding student loans, nearly all of which are held or backed by the federal government. Lawmakers have provided students with options that let them punt on repayment without triggering delinquency or default. Lately, students have been availing themselves of those options at rising levels.

The forbearance benefit, for example, lets borrowers postpone payments for up to three years. By law, loan-servicing companies have a lot of discretion to grant forbearances, and getting one usually takes only a phone call on the part of the borrower. Some borrowers might have to complete a simple form and meet a payment-to-income test. But overall it is the easiest and fastest way for a borrower to suspend student-loan payments.

rather than that it is “crippling students, parents, and the economy”:

It’s a negative sum game for both student-borrowers and the economy. According to the Consumer Financial Protection Bureau, student loan debt has reached a new milestone, crossing the $1.2 trillion mark — $1 trillion of that in federal student loan debt.

This pushes student loan debts to dizzying new heights, as they now account for the second highest form of consumer debt behind mortgages. With the federal debt at $16.7 trillion, student loan debts measure at 6% of the overall national debt. This is no small figure, and national debt carries many consequences including slowing economic growth (translating into fewer jobs being created) and rising interest rates. Capital will not be as easy to access.

My own view is that student debt is a colossal waste of resources, predicated on an error that has been made by three consecutive presidential administrations—that college degrees will result in better jobs. It’s cargo cult thinking: because people with college degrees have jobs that pay more you’ll get paid more if you have a college degree. It’s not the college degree. It’s the jobs. If burger flippers at McDonalds all have college degrees, they’ll still be paid minimum wage. They’ll just have debts they will never be able to pay off which means they’ll consume less and there will be less economic activity than there otherwise might be which will make us all poorer.

However, let’s play along. Imagine that we really do want, say, 60% of Americans to have college degrees. Leave alone that a supermajority of kids who enter college aren’t ready to do college level work (many never will be). We’ll just assume it away.

From a societal standpoint what’s the most efficient way to pay for it? I think it’s obvious that what’s needed is a very much less expensive college degree, presumably by putting some or all of the process online.

And even if you insist on continuing the absurd method we have of financing college educations, more of a persistent subsidy to colleges than a practical way of financing an education, how can financing art history or communications majors be considered anything but an unacceptable risk? When you apply for a business loan or a home loan what you’re financing has at least some bearing on whether you get it. That future creditworthiness has no apparent bearing on whether a loan is issued is a clear sign that the scam is on. Is Mr. Delisle upset that the scam is being detected?

30 comments… add one
  • Modulo Myself

    According to USA Today, the most popular major is Business Administration. The second is Psychology.

    Being a therapist is a highly useful position, but I don’t know a single therapist who majored in Psychology and I can’t imagine what Business Administration is. Learning how to do pivot tables in Excel?

    But to be charitable–basically the top two college majors are composed of people who want to make money, who like, I presume, interacting with other people and who profess an interest in how other people think. So I don’t see a) how you replace this with online learning and b) how you fill the hole in American life by getting rid of college as a place to socialize and grow older.

    People mock bs-sounding college courses like post-colonial transgendered currents in modern East Asian film, but these courses are far easier to do online and without the college experience. Also, the people who populate these courses are generally not-exactly thrilled with the college experience.

  • TastyBits

    The student credit is following the housing credit model. There is a supply of credit, but the only way to make a profit is by lending. Since the money can only be used for a college degree, college degrees are being pushed. Like houses during the bubble, the future is being created as an extension of the past.

    Colleges push bogus degrees like used car salesmen. Several years ago, I went to an open house with my stepson, and they were pushing hard. He wanted to go into a Video Gaming curriculum, and since it was a computer science degree, they were playing up the IT aspect.

    I knew he would have a few options, but I can only guess what the History department was telling the potential students.

    The housing was blamed on Wall Street. Maybe they were not the problem.

    There is asset inflation, but creating a bubble is not as easy because you would need to leverage the debt from one degree into another degree. This is an example of the government distorting several markets. In addition, the student debt will displace other credit creation.

  • ...

    I’m betting that Delisle is upset the scam is being detected. If enough student loan holders stop paying, perhaps bankruptcy laws will be changed to allow discharge of student loan debt. That would end one way they turn people into debt slaves, and we can’t have that.

    I’ll note too, per MM above, that Delisle’s formal education is in Public Policy. Clearly a growth field – if you’ve got connections. So he’s a functionary of the governing class, no doubt hoping for an under-Secretary job in the education department of the next Republican Administration, should such ever come to pass.

  • Being a therapist is a highly useful position, but I don’t know a single therapist who majored in Psychology and I can’t imagine what Business Administration is.

    When I was in college (before the glaciers descended and dinosaurs ruled the earth), in addition to the courses I actually took I also audited at least one course a quarter. I’ll never forget what Bernie Beck said in his first lecture for Sociology 101: “People study psychology to come to an understanding of their own psychological problems. People study sociology to come to an understanding of their own sociological problems. That’s why all sociologists are either black or Jews.”

  • PD Shaw

    At the hospital my wife is affiliated with, therapists (LCSWs) are being integrated into treatment plans for purposes of communication between doctor and patients. This is either because doctors have such high labor rates, that it’s become efficient to delegate communication to non-physicians, or too many physicians are not native English-speakers, or it’s a new reimbursable cost that insurance/ACA will reimburse. We may need more therapists.

  • Mercer

    “Is Mr. Delisle upset that the scam is being detected?”

    No. He is upset that forbearance is letting it not be detected.

    The Forbes article notes many community college graduates have debt. I think this is a waste since tuition for public two year colleges average 3k a year. If someone can’t pay that amount I don’t think they belong in college.

  • Guarneri

    Mr. Duel isle is concerned about the outrageous notion that people should repay their debt obligations. My god. What next, people should live within their means??

    Student loans have become the new home loans. Like home ownership, college education is viewed as “good” so the government – read borrower’s tax paying neighbors – is subsidizing the borrower and by entering the market for education services driving up the cost of those services to the benefit of the education-industrial complex. And since as noted in the link money is fungible lets just go all in, subsidize room and board, tuition, beer and condoms. Free beer for everyone!! What could go wrong??

    Sarc-meter turned down, once again we have a dislocation caused by the market being entered by a diseconomic agent, just like medicine or home loans/prices. Subsidized financing = price appreciation. So what to do besides grouse?? I fall more towards the Dave camp here. We are encouraging too many and too many worthless degrees. I don’t go quite as far as I perceive he does. If there is a job in metallurgical engineering then you’d better have a degree in metallurgical engineering, not women’s studies or experience flipping burgers. But yes, it does not follow, that just because you have a degree you won’t find yourself flipping burgers.

    As you might expect, just as I had little sympathy for un creditworthy home buyers, I have little sympathy for the student loan borrowers (do we have to again go through the charade that the poor dears were suckered in by liars loans) or the colleges, or the red herring that society is dragged down by debt. These are just flimsy arguments for continued subsidy. I have an amazing alternative. If you can’t finance the expenditure, or the expenditure is not worth the price, then I’m kinda, sorta thinkin don’t make the expenditure or, for certain types of educational experiences, call 1-800-Phoenix.

  • My view of higher education is that the emphasis on it over the last several decades has been confusing causes with effects. College educations were something that the children of elites got. It does not therefore follow that getting a college education makes you elite. The litmus test for determining elite status will change to something else.

    When a million physicians, all of whom have college educations, have incomes two, three, or ten times the median, it skews the entire curve (another abstraction as mentioned in another post) for incomes by educational attainment. Add a few tens of thousands of lawyers who attended twenty law schools and a relative handful of MBAs and it makes college educations look much, much better than they actually are as predictors of earning power.

  • steve

    1) Most kids would not be able to complete courses, real courses, online. I think this is a fantasy people should mostly give up. Maybe some survey courses and introductory courses can be done that way, but it just won’t work for most kids.

    2) We could certainly start by not allowing govt financed loans to go to schools with poor track records of their students getting jobs or having trouble paying back loans. Unfortunately, these schools are mostly protected by parts of Congress. Somewhat (only somewhat) analogous to the liars loans, people are going to these schools because the schools are very good at hiding their poor performance, plus many of these kids never really think to investigate this stuff. Hard to believe that an 18 y/o would not be financially sophisticated enough to figure it out.

    3) College educations used to be for the kids o the elite. That changed with the GI Bill. (Got me through.) For many years after the introduction of the GI Bill we were the world’s strongest economy, by far. While that was only part of the reason, it is instructive, I believe, that other countries that have become successful (Japan, South Korea) or countries that have maintained success (European ones) have also increased their numbers of college grads. The future does not lie with manual labor.

    That said, I think there is an upper limit to the number of kids that will benefit from a 4 year college degree. I don’t know what that is, but suspect we are probably past it. I think we should be emphasizing one and two year programs that will prepare kids for specific vocations. We also need these kinds of programs so that we can constantly retrain people.


  • While that was only part of the reason, it is instructive, I believe, that other countries that have become successful (Japan, South Korea) or countries that have maintained success (European ones) have also increased their numbers of college grads.

    About 43% of U. S. residents have college degrees. That’s pretty typical of OECD countries—just about the same as the UK, Australia, and Sweden. Only Canada has a significantly higher percentage, that’s just over 50%, and Canada selects its immigrant population much more stringently than we ever will. That’s not irrelevant. Something like 10% of the U. S. population is immigrants, at least 70% of whom have little education.

    I think the reality is that we need a diverse economy. A majority of Americans just can’t do college work. Some people will be in the professions, some will work with machinery, some will do manual labor. We’ve got to figure out how to allow people who aren’t physicians, bankers, or public employees to lead decent lives. I don’t think we can get there by subsidizing the aforementioned as ferociously as we are now.

    I also don’t think we can get there with as many unskilled and low-skilled immigrants as we’ve had for the last couple of decades.

  • PD Shaw

    Probably need to keep some perspective on the student loan problem. Per Brookings, “the average balance of outstanding student loan debt for households with some debt was $25,700. The median debt was $13,000, and seventy-five percent of borrowers had less than $29,000.”

    People with over $100k in debt for a religious studies degree, working as waiters exist, as do people with $25k in debt who couldn’t finish their degree. Some of what has happened is that states have stopped funding their public universities.

  • I guess I know too many young people with six figures in education debt.

  • PD Shaw

    Also add the related problem, college graduates make 15% less than they did ten years or so ago.

  • PD Shaw

    Dave, the link claims 3% have $100k debt among households paying students loans. Are these elites that challenge the equity of any government subsidy? Are they victims of higher education scams, particularly by some of the for-profits? Do they have a career path where $100k is not an unreasonable burden? Are they the victims of the foolishness of youth, enabled by generous subsidies?

    (If the student loans are held/paid by the parents, there also might be a tax strategy here, as some would argue the student loan subsidy is being underused for financial planning purposes)

  • Also add the related problem, college graduates make 15% less than they did ten years or so ago.

    And a smaller proportion of that lower income is disposable.

  • After reading the article you linked, one of the problems I see is that the denominator of the ratio they’re considering is “borrowers” not graduates. In other words, if somebody goes to a community college for a couple of semesters, incurs a couple of hundred or thousand dollars in debt, and then quits, they count in the total. They’re even less able to pay off the debt than somebody who gets their PhD and has $250,000 in education debt (I know quite a few of these) but their low debt figures skews the results downwards.

  • steve

    “Dave, the link claims 3% have $100k debt among households paying students loans.”

    Nearly all of my new hires carry over $200k debt. I suspect that the large majority of these folks are people in better paying professions, physicians, law, IT, engineering, who can afford to pay this debt. Would be nice to see it broken down. Rather than worrying about these, why not worry about those who really are not getting work after education? Stop sending loans to schools that produce students unable to pay them back. Either the schools will improve or shut down. If students are paying back their loans, I can’t say that I particularly care whether 40% or 50% of our kids are going to college.


  • ...

    Also add the related problem, college graduates make 15% less than they did ten years or so ago.

    And a smaller proportion employed, most likely.

  • ...

    As Schuler notes, people making less have less disposable income.

    It’s similar to the concept of high stakes gambling. Floyd Mayweather, Jr betting $5,000,000 on the Super Bowl isn’t high stakes gambling. A guy calling an all-in bet on a straight draw, betting the rent money for his family, is high stakes gambling, even if it’s only $500 – it’s all he’s got, and his family needs the money.

    That is, cash is a relative thing. $1,000 would mean a lot to me now. I’ve got friends who will take that as pocket money for a junket to Vegas to blow at the craps tables. The value of cash depends entirely on how much you’ve got.

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