The Student Loan Bubble

I’m really thrilled with the responses to my recent article, Is the Near-Trillion Dollar Student Loan Bubble About to Pop?

A couple of people have written really nice long responses to it that add some significant value. There are a million articles that could be written about the student loan crisis, and I’m gratified to have helped move the conversation forward for other people to spin off of.

I thought I’d link a few of them here for you.

Kay Steiger dug in deeper to the causes for the rising tuition that’s created what I and others refer to as the student loan bubble. She wrote:

Shrinking state investments in higher education. Part of this is that, public universities, which educate a large percentage of students, have seen the amount of public financing shrink. Though states were once dedicated to ensuring a free or low-cost education for its residents, that commitment has largely fallen by the wayside was state budgets tighten. The Center on Budget and Policy Priorities found that since the beginning of the recession, 43 states have cut funding assistance to public universities.

Among other reasons she highlights, one stands out:

Some schools are actually ripping people off. While the vast majority of colleges really are there with the mission of educating their students and helping them reach a better financial future, there are some schools out there that seem to actively be ripping people off. Some of these schools, according to government investigations, seemed to be calculating tuition prices to maximize the amount of federal subsidies, recruiting students by way of questionable tactics, and providing poor-quality training for jobs they purport to prepare students for. (Let me be clear on this—not all for-profit schools are setting out to rip people off. I’m talking about some of the particularly bad actors.) This gets into much of the debate over for-profit colleges, the Department of Education’s attempt to regulate them. Lately the for-profit colleges themselves have released a code of conduct to demonstrate that they can be a self-regulating body. Whether this combination of administration regulation and self-policing works remains to be seen.

Where I differ with her is over solutions. She suggests that we want to encourage students not to take student debt lightly, just as we don’t want to encourage mortgage holders to walk away from their homes. The problem right now is that students are saddled with debt that they’re stuck with for life. They can’t walk away from the asset they purchased when its value drops like a person who bought a house can–they can’t even declare bankruptcy if the current economy has led their purchase to be worth less than they thought–in this case, if they’re unable to find work that allows them to pay down their debt.

Mike Konczal also responded to my piece, and compared the never-ending nature of student debt to colonial indentured servitude:

How well does colonial indenture match up with student loans?  Pretty well I’d argue.  That’s the provocative thesis of this great Jeffrey Williams piece in Dissent, Student Debt and the Spirit of Indenture.  I brought this thesis up to a conservatively-minded economic historian I know and he delighted in it – as he pointed out, in colonial times people died so quickly and they could disappear easily.  As such indenture needed to function in a “total institution”-like space with coercive punishment very present to get maximum returns to creditors.  With today’s longevity, as well as our surveillance and monitoring technologies, indenture can function in the background as a cut deducted from your checking account every month for a few decades.

Steiger suggests that maybe the key to the question about student loans lies in the situation of the person I called Max Parker in the article, who told his story of having to leave school midway through and being unable to return because of the size of his debt.

While I agree that Parker’s case is heartbreaking, I don’t think that’s the most important problem. I’ve often quoted the wonderful BBC journalist and author Paul Mason on the “graduates with no future,” the students around the world who finished school at a time of economic crisis, who did everything they were supposed to do and still have no opportunity. In the UK, where Mason is based, the current graduates don’t have US-style student loans, yet they still have no future. And here, the rate of default is rising for grads–and even those who, like Colleen Williams, mentioned in my piece, manage to make their monthly payments, are stuck pumping lots of money into servicing their debt rather than into the economy, creating yet another drag on the whole.

Konczal takes yet another tack in pointing out that the current system of student loans is unsustainable, looking at those who do go on to economic success (whether they are happy, fulfilled, or productive is another argument entirely, one should note) after graduation. He quotes a paper by Jesse Rothstein, Constrained After College: Student Loans and Early Career Occupational Choices, which says that “an extra $10,000 in student debt reduces the likelihood that an individual will take a job in nonprofits, government, or education by about 5 to 6 percentage points.”

He continues:

For our purposes, even those for whom this arrangement works find themselves pushed out of government, education or non-profit work by their debt loads.  Debt puts contraints on what people are capable of doing, and one way out of that constraint is to work in the fields that pay the most.  For those who want to see our best working in schools, government, nonprofits, taking chances starting entrepreneurial work or simply not working to replicate already existing power structures, this is a terrible arrangement.

We can see this in action as the financial sector has grown all out of proportion with the rest of the country (and broken the economy, leaving so many of these grads stranded, along the way). A recent study points out that the financial industry has “cannibalized” (no, really, that’s a quote) the best and the brightest not just from business schools. No, it’s taking “new master’s- and doctoral-level graduates of science, engineering, math and physics, and pays them starting wages that are five times or more what they would have earned had they remained in their own fields.”

(The same can be seen in the medical field, as fewer doctors are going into primary care because it pays less than specialty fields do.)

Were Max Parker to graduate with his double degree in econ and physics, the likelihood that he’d end up just the kind of person being headhunted by financial firms–and feeling obligated to go there, just as he’s now feeling obligated to go into the military, because of the size of his debt.

In other words, Konczal notes, even when the system works, it’s actually working to create more inequality by sucking up those who are considered worthy into high-paying jobs and leaving the rest with their incomes cannibalized for decades. It’s creating a brain drain on just the kinds of things we want our well-educated young people doing, working for social good, innovating, going into public service–as Tarah Toney pointed out in my piece, she wanted to go into teaching after working her way through school, but there were no jobs and her debt pushed her instead to take a job at a real estate office.

Konczal and Steiger both note that keeping tuition low, especially at public universities, is a necessary solution to the problem. But that would only solve the problem for some of the grads of the future. Right now, the economy desperately needs spending and, as Rep. Hansen Clarke noted (and I quoted in my piece) households are burdened with debt that in most cases they took on in good faith, and the majority of the new jobs that have been created since the beginning of the recession have been low-wage, hardly enough to keep someone going, let alone allow them to pay hundreds of dollars a month on a student loan that seems, more than ever, like a waste of money.