Easing the College Debt Bubble Before It Pops

In what was the first of several posts in my "Is College Worth It?" Series, I questioned whether college should be the default destination for all high school graduates. One of the big reasons for asking the question, I noted, is the amount of debt students are accruing--and increasingly unable to pay. Everyone remembers how the economy almost collapses when bubbles have burst in the past, right? Remember how all that bad debt to homeowners to buy houses way out of their price range resulted in the collapse of the housing market? Well, the next bubble may have been identified, and it is student debt.


The Problem

Student debt is often called "good debt." It is an investment in yourself, the story goes, because you will make more and pay back that money no sweat with the swank job you land out of college. College also cost a lot less. Now, college prices are increasing astronomically. The College Board reports (pdf) that over the past decade the tuition for public four year colleges has increased by 54 percent in inflation-adjusted dollars. For private universities, tuition increased by 33 percent in inflation-adjusted dollars. That's a huge increase, especially when we already have seen that nearly a third of college graduates are not improving in any higher-level thinking skills. With high unemployment and increased credentialing, many people are not getting those good jobs they were promised. Without good jobs and with greater amounts of debt, more and more people are unable to pay. Even those who drop out are often saddled with debt (69% of college drop outs have debt according to the Economist).

When people cannot pay, suddenly good debt becomes bad debt, and increasing amounts of bad debts create bubbles. As the Huffington Post reported, this year the amount of student loan debt eclipsed the amount of credit card debt. Yikes, maybe dropping you Visa on some Gucci is the new "good debt." Either way, over 10 million American students hold debt amounting to at least $750 billion dollars with Sallie Mae alone (wasn't that the amount of one of those bailouts?) and perhaps as much as $1 trillion if you include private loans. The average student graduating in 2010 owed about $25,000. Without jobs, the amount of students that could not pay and defaulted on their loans increased from seven to nine percent last year.


Just How Enslaved Will You Be?

Let's do some brief calculations using the FinAid! loan debt calculator:

• If you have the average amount of debt ($25,000) after college and you get a "reasonable" interest rate of 6.8%, you will need to pay $290 a month for ten years and need roughly $35,000 in annual income. At the end of the day, you will have paid almost 40% more for your college education ($35,000) than you were told college would cost.


• If you go to a private university, and borrow $25000 per year at the same interest rate, you will be paying $1,150 per month for ten years and will need to earn about $92,000 per year after graduating. At the end of it all, your degree will have cost you $38,000 extra in interest.

With so many students affected and saddled into debt for so long (student loan debt is one of the few kinds of debts that you can never get rid of, interestingly enough), something needs to change. Parents and students need to stop taking it for granted that college will always be worth it and that they will be able to pay off whatever debt they take on. Schools and banks need to do a better job of both reigning in tuition and fees and making sure that the consequences of taking on debt are clear to borrowers. The federal government needs a better managed system. I am a bureaucrat, and I work with many talented colleagues. They are not so talented at managing loans, as evidenced by my having to call the Department of Education FOUR times to try to figure out how to consolidate my loan. The fourth call was me telling some clueless Department of Education sap how to go about doing their job, and that is scary.


What can be done?

One of the big failures I see with the Occupy Movements is that they have not moved beyond identifying the above problem and pushing for concrete policy changes. So, I would like to propose some things that will help ease this bubble at the grassroots level, in the banks, and in the government.
At the grassroots

1. Students need to understand the burden college will represent for at least ten years out of school. HS counselors should be trained and required to dispassionately walk through how much going to a school will cost, how long it will take to repay that amount, how much income one will have to earn to repay, etc.


2. Parents and students might read more of the works of James Altucher and
   decide whether or not there is a more cost effective way to learn than college
   that will not saddle them with so much debt (particularly in the case of
   students who are not terribly inspired to go to college).


3. Start saving money early for your child (or self) and consider delaying college until you have a sizeable savings. If you save just $500 a year from your child's birth,
   the calculations I did above change dramatically. Someone with the average
   amount of debt now only owes $16,000 and pays only $190 a month. Someone
   with 100,000 in debt will pay a large, but more manageable $1047
   monthly.


4. Encourage your child to pay some money while in school to reduce the
   amount of principle.
   

In the banks

1. Don't allow banks to capitalize interest until 6 to 12 months after graduation (when interest capitalizes, it becomes part of the principal, meaning you are going to pay interest on your interest!).


2. Cap interest rates at a certain percent (I would say 5%), and let them float if the national borrowing rate is below that amount (but not above). I pay a much higher rate (7.3%) to borrow than banks pay to borrow money right now. That is ridiculous given that education is a public good.


3. Small banks are more responsible lenders and loans should be federally backed and administered through them. They are likely to be more honest and communicative and will want to help the student to pay back the debt. Further, it distributes the debt so that it doesn't hit any one single lender and cause a huge collapse.


4. Offer rate incentives for responsible payers, or consider offering perks to those who save and take out a loan or to those who take out a loan and continue banking with your institution.

In the Government:

1. The federal government should guarantee, but not service loans. They have proven time and again that most of them are simply not capable. It's not their fault either: you are asking bureaucrats to be bankers. You might as well have them managing oil rigs or building bridges. Regulating to ensure equal access to credit for college aspirants is more appropriate than providing the loan.


2. Make student loan debt not-for-profit: if the federal government makes far more than the ticket price of the degree plus inflation, there is an issue. The government already reaps the benefits of lower likelihood to commit a crime and a higher likelihood to have a job. Georgetown's Center for Workforce Development found that kids with graduate degrees have only a 3% unemployment rate.


3. Create a program that allows parents and children to deduct savings for college from their pre-tax income. If the tax payer is footing the bill either way, it might as well be for actual skills development instead of paying interest.


4. Build stronger alternative schooling that feeds directly into high school (especially vocational programs) so that kids have a viable option if they choose not to go to college.
   Increase awareness of grant programs early in high school to avoid saddling people with debt. EdWeek blogger Caralie Adams wrote a piece on how many parents do not know about federal grant programs, based on a report from the College Board that showed that poorer, less educated, and Latino parents were all far less likely to know about these opportunities. Fewer than half of parents knew the cost of a college education in-state.


5. Promote policies that reduce or eliminate debt with much more certainty for key sectors. For example, teaching would be impossible for me right now given teachers' salaries and my own debt. But, if I was allowed to pay at an income-based rate and had my interest capped, I could enter many fields that would allow me to invest more in society.


6. Deny funding to and publicly censure colleges that raise their rates unjustifiably. If a college is not doing better at producing employment, post-grad degrees, or enhancing students' skills, they should not be allowed to increase tuition. This is particularly true for schools that do not incurr higher expenses directly related to student learning or in schools that increase class sizes (without staff increases), widely slice majors, or defund research or volunteer opportunities for their students.