It used to be that Americans had too much debt. Now they don't have enough. The Wall Street Journal reported over the weekend that "household thrift" is a key reason the economic recovery has been so weak.
But student-loan debt seems to be immune from this newfound penny-pinching. Students and their families are still taking on record amounts of debt to pay for a college education. Despite some debate over the exact amount of outstanding student-loan debt right now, the number has already surpassed credit-card debt and is expected to cross the $1-trillion mark for the first time this year, says Mark Kantrowitz, publisher of FinAid, a Web site offering student-aid advice and tools.
The growing burden of those payments in a tough economy is becoming a hot political issue, especially in recent weeks with the Occupy Wall Street movement. That's one reason President Obama announced new measures on Wednesday to expand loan consolidation and income-based repayment programs a bit.
Far more radical or broad-based ideas have been proposed recently, including forgiving all student debt to stimulate the economy or expanding income-based repayment to everyone.
Most Students Need a Stake in Paying for College
What worries me in some of these debates is that student-loan debt of any amount is portrayed as the villain. Students or their parents at most income levels should have a stake in paying for college. They are, after all, getting something in return. Taking on a student loan seems like a good investment, when placed next to the lower unemployment rate for college grads and the lifetime payoff of a bachelor's degree.
"The asset you are borrowing against is human capital," explains Justin Wolfers, an associate professor of business and public policy at the University of Pennsylvania. Unlike home values, the value of human capital isn't likely to drop sharply in a year, he says.
More than half of the students at public and private four-year colleges are now graduating with debt, according to the College Board. The average per borrower at public colleges is $22,000; at private colleges it's $28,100. It has been reported that the financial payoff of a bachelor's degree is $550,000 over a person's lifetime, so the average level of debt still seems like a good investment.
Of course, don't tell that to recent college grads who are unemployed or working in jobs that don't require a bachelor's degree. In a global economy, there could be a limit to the human capital of many college grads in the United States (read: lifetime income), so while a college degree might make good economic sense, one at any cost probably doesn't.
And that's where the debate on student debt should be focused: How much is too much? While economists are confident that a college degree is worth more than just a high-school diploma, "there is less evidence that an expensive college degree is worth it compared to a cheap one," says Wolfers, the Penn economist. "Going to college is worth it, [but] doing so expensively might not make a lot of sense."
That means big trouble for expensive colleges where students graduate with higher-than-average amounts of debt. Those institutions have been helped by the association of price with quality in many people's minds, the wide availability of loans, and a willingness of students and families to take on a lot of debt.
End of an Era of Easy Money for Student Loans
Those days are probably coming to an end. If we're indeed entering an age of austerity in Washington (a big if), the availability of student loans will probably tighten. The federal government makes 90 percent of new student loans, and as Mark Zandi, chief economist at Moody's Analytics points out, it doesn't do so based on the creditworthiness of borrowers. "The federal government will have to do some form of better underwriting, or otherwise they will get swamped with losses," Zandi says.
Students and their families will also probably get clearer financial-aid offers from colleges, if a push by the federal government for better disclosure succeeds. One hope is that clearer aid-offer forms will help students better understand the type (especially loans vs. grants) and amount of aid they qualify for, and will make it easier for them to compare aid offers from different institutions.
With potentially less federal loan money available and more information, perhaps students and their families will begin answering the question: How much is too much?
Follow Jeff Selingo on Twitter: www.twitter.com/jselingo
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Where are the private banks and private universities in this vision? Private banks get public subsidies to profit from bonds in the government-guaranteed financial markets. Private universities lead in high tuition; they use tuition and living money for their gain before a penny is paid on the underlying loan. Stop protecting the rich.
http://ninjageneration.com/2011/02/student-loan-scam-flowchart/
Where are the bribed politicians? They disinvest in public higher education, turning public schools into private ones and insuring a constant flow of money to private banks and universities. Stop protecting the powerful.
Where are the "legacy" admissions for the rich? Why don't they have to "answer" any questions?
http://www.nytimes.com/roomfordebate/2011/11/13/why-do-top-schools-still-take-legacy-applicants/?ref=opinion
Why do lower and middle class families have to "lose"? They pay for government welfare to the private sector; public tertiary education should be a right and public good. That's what we do for primary and secondary school. Hard-working educated people benefit their entire society. We need more meritocracy and more democracy in the US.
Stop blaming the students. Stop blaming parents. Stop talking about bad "consumers" who supposedly pick bad and irresponsible majors in this depresson-era job market. You are insulting taxpayers as well as citizens of the US who deserve better.
Paying more is not a better education. UC tuition increases exceed the national average rate of increase. The UC Board Of Regents jeopardizes Californians attending higher education by making UC the most expensive public university.
Self-serving tuition increases are used by UC President Mark Yudof to increase the pay of 80,000 eligible faculty & others. Payoffs like these point to higher operating costs and still higher tuition for Californians. Instate tuition consumes 14% of Ca. Median Family Income! UC is hijacking our kids’ futures: student debt.
I agree that faculty in higher education and senior management, like Yudof and Birgeneau, should consider the students' welfare & put it high on their values.
Deeds unfortunately do not bear out the students' welfare values of campus senior managements and the UC Board of Regents.
Opinions to UC Board of Regents, email marsha.kelman@ucop.edu
It depends upon the reasonably expected return upon the educational investment.
Students really need to face reality when it comes to selecting their major and deciding which school they want to attend.
Pay increases for generously paid Faculty is arrogance. Instate tuition consumes 14% of Ca. Median Family Income!
President Yudof and Chancellor Birgeneau have dismissed many much needed cost-cutting options. They did not consider freezing vacant faculty positions, increasing class size, requiring faculty to teach more classes, doubling the time between sabbaticals, cutting and freezing pay and benefits for all chancellors and reforming the pension system.
They said such faculty reforms “would not be healthy for University of California”. Exodus of faculty and administrators? Who can afford them and where would they go?
We agree it is far from the ideal situation, but it is in the best interests of the university system and the state to hold the line on cost increases. UC cannot expect to do business as usual: raising tuition; granting pay raises and huge bonuses during a weak economy that has sapped state revenues and individual Californians’ income.
Regent Chairwoman Lansing can bridge the public trust gap with reassurances that salaries and costs reflect California’s economic reality. The sky will not fall
Opinions? Email the UC Board of Regents marsha.kelman@ucop.edu