Economy / Politics

Confessions of a Student Loan-Aholic: How we fix the student loan bubble

A little youtube video on student loan debt

I’m gonna come clean. I have a lot of student debt. I mean a lot. I have $150,000 in student loan debt. That hurts to type. Thats how much a law school education will run you now a days if you’re white male middle class graduating cum laude from an undergraduate school. My grades were good enough to get me into law school but not so good to get a fat scholarship. My parents made enough money that I have lived a pretty comfortable life but not enough to pay for school for me. And they made too much so that I wouldn’t classify for many different grants and scholarships for families of lesser means. I’ll put my debt more into perspective, if I paid all my debt straight up for 10 years, it would be almost $2000 a month. That really hurts to type. Its actually embarrassing.

Now I have to admit, if I could do it all over again I would still do it. Though my job prospects since graduating and passing the bar haven’t been out of this world, in all honesty they haven’t been wretched either. Since graduating I’ve had several job offers including working in a firm as an attorney that I’ve passed up. There have also been some jobs that I hoped to get that I didn’t but overall my law school education, though ridiculously expensive, has created opportunities for me. Oh by the way I am not paying the $2000 a month. There are programs initiated by the government to help students pay. Basically I am paying about 15% of my income for the next 25 years. Income based repayment its called. If there is anything left after 25 years the government will forgive the debt. At the end I might have some debt forgiven but not too much. But herein lies the problem, I’ll explain.

In the 1978, the Federal Government, under the patron saint Milton Friedman’s advice, began to fund student loans in the attempt to better educate the population. The idea was an intelligent populace was good for the economy by being able to perform advanced skills only obtainable through a higher education. Thus the economy would grow because everyone had skills to offer. Sounds like a fantastic idea and who would ever be against education? Just like who would be against homes for every American?

This kind of thinking is always in a politicians interest and thus for almost 4 decades now we have poured more and more money into higher education until now that the federal government backs 95% of all student debt. The odd thing was for every dollar that was poured into education the schools could raise their price.

Here’s the amount of student loans the government has offered:

student-loan-debt-sallie-mae

Here’s what college tuition prices have done since the 1980s:

Higher Ed Inflation

Notice a pattern there? What the government has done was unintentionally brake the pricing system in the college market. In economics the price of something is determined by the value society collectively decides it is. Basics of supply and demand. The more people buy of something the more valuable or cherished it is to society. Thats why you can get a Pittsburgh Pirates baseball ticket for $14 (been lousy for 21 years…but this is the year!!!) while Red Sox tickets will run you $60. More people competing for the same goods. What the government has essentially done is say, “well we think everyone should go to watch the Pittsburgh Pirates play because we feel so terrible for them, therefore we will pay for everyone’s ticket (oh and you have to pay us back later over a long period of time).” This would create a false illusion that the Pirates are in demand while in reality everyone is only going because their ticket is paid for when otherwise they might have not. But while everyone’s tickets are paid for, the Pirates could then raise ticket prices little by little every year…because people will still go because they aren’t paying for it….until later. Therefore the Pirates have absolutely no incentive to lower prices because the money keeps pouring in no matter how poorly they play. Now imagine that went on for decades. Thats the student loan crisis.

While that may not be the best illustration I hope you see what I am saying. I am also not saying that schools are worthless or a degree isn’t valuable to your own prospects for a job or to society at large. Clearly education is a good thing just as clearly a home is a good thing. Just because there was a housing bubble and bust doesn’t mean that homes are worthless it just meant they were priced too high. So what I’m saying is school is valuable it has just out-priced itself.

So how do we fix it? There has been lots of proposals for a bailout for all student loans but that clearly would make the problem worse and not better as it would be a bonanza for schools putting up shiny new stadiums and professors’ pensions. And in the long run would just make college colossally expensive for the next generation…or even more so. President Obama has been pushing for more student loan income based repayment. However while I’m taking advantage of it I recognize that I am making the system worse in the long run. This will also allow schools to charge whatever they want. A school could charge you $500,000 and it wouldn’t matter as long as you paid 15% for 25 years and the rest would be forgiven by the government. This will quickly lead to elevated school tuitions and a large government deficit. So yes I am a hypocrite.student-loan-default

The real solution here however is to let students default. Student loans are the only type of debt that cannot be extinguished in bankruptcy. You can declare bankruptcy for credit card debt, you can walk away from a mortgage, but student loans are a ball and chain that can never be extinguished under current law. A friend of mine who works in the banking industry pointed out to me that a default is not a panacea for a defaulter. Your credit is destroyed and it will make your life very difficult to navigate in the future. I agree and thats the point. It is not in the students interest to default unless they are so hopelessly in debt that just spending what you make is a better option. If students are allowed to default the government will not be on the hook for a bailout and schools will be forced to come to the table to negotiate. Under current law in order for schools to qualify their students for federal aid their previous students have to be making at least some kind of payment. So therefore under current law if you pay 15% of your income for 25 years and then the government pays the rest, makes no difference to the school. So by defaulting, schools will be forced to negotiate lower payments directly with the students otherwise the students could walk away. This would lower tuition prices in the future and for current students making payments. Even if a student never actually defaults, the threat is enough. The schools will be forced to cut back building that new basketball stadium its true but thats just the price of an education. That felt good to write.

I don’t mean to defer responsibility from people like myself. Clearly I am responsible in some degree. However so are the schools who take advantage of the system and so too is the government who makes it possible. Oh and not only are schools getting more expensive because they have no incentive to change, the education is getting less in tune with current market demands for the same reason. That why you can graduate with an anthropology degree and work as a bank teller. Good thing you took the courses on Native-American History. Lets fix this problem so the next generation can afford college.

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2 thoughts on “Confessions of a Student Loan-Aholic: How we fix the student loan bubble

  1. I’m with you here my friend – Jess and I are well into the six figures in loans as well and job prospects are pretty low. My problem was that about 5 years into my 10 years of education I realized that what I was doing was a mistake; however, the only way i stood a chance to pay off the loans was by going to school for another 5 years. So, we have quite a hole. I agree with most of your analysis; however, the one area that I would differ on is the role of government money. Tuition really took off over the last decade. This correlates directly with the Bush tax cuts. Because of the couple trillion dollars in tax cuts, Universities got a lot less funding, which meant they had to raise tuition. I have witnessed these cuts directly as both my wife and I nearly lost our jobs, tuition and fees have skyrocketed, and we have more students and less faculty than ever. There has never been an explosion in tuition as there has been since the Bush tax cuts, some of it direct causation, and other parts a strong correlation.

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