Investing in Debt

Peter Wood

News item:

Under the debt ceiling deal signed into law on Tuesday, government-subsidized loans for graduate and professional students across the nation will be eliminated in July 2012. Those students will begin paying interest on their loans while still in school, or let it accumulate.

—Associated Press, August 3, 2011.

A Wall Street analyst:

The longer-run outlook for students lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the larger economy…[T]here is increasing concern that many students may be getting their loans for the wrong reasons, or that borrowers—and lenders—have unrealistic expectations of borrowers’ future earnings. Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.

—Christian Deritis, “Student Lending’s Failing Grade, Moody’s Analytics, July 2011.  Pp. 54-69.

A think tank reports:

Borrowing is increasingly the norm in American higher education. The long-term consequences of floating colleges on a sea of debt have yet to be fully realized, as a growing number of students leave school with tens of thousands of dollars in loans that can take as long as 30 years to repay and cannot be discharged in bankruptcy.  National graduation rates have been stagnant for decades, and many competitor nations are helping more adults earn valuable college degrees. The sharp increase in the national borrowing to credential ratio suggests that urgent action is needed to arrest these trends.

—Kevin Carey and Erin Dillon, “Debt to Degree:  A New Way of Measuring College Success.”  Education Sector.  August 2011.

And President Obama has warned:

And all the progressives out there, I want you to understand that we can’t just ignore this debt and deficit, we’ve got to do something about it. But economic growth, making ourselves more competitive isn’t just about cutting programs. It’s also about making investments in our people. (Applause.)

It’s also about making sure we’ve got the best education system in the world; that we’ve got the best scientists and engineers and mathematicians in the world; making sure that we prize our diversity; making sure that we’ve got a social safety net for the aged and the infirm and our children. That’s part of what makes us a great nation.

—Speech in Chicago, Wednesday, August 3, 2011

We are a great nation with a great big debt problem and a multitude of smaller debt problems. The larger problem is now compounding the smaller ones. In the case of students pursuing graduate degrees, this will be literally true as of July 2012, when they start paying interest on their loans while still in school. But it is true in a broader sense as well. The efforts to make college affordable to all and accessible to most have resulted in our enticing tens of millions of young people into assuming a destructive level of debt. Those private lenders who remain in the business of issuing student loans after Congress switched last year to Direct Lending for federally-guaranteed loans are recalculating their risks.

A generic college degree doesn’t carry much weight anymore for anyone who is looking for a job. Those who have followed the writings of Richard Vedder, for one, have had a good schooling in these economic realities. But distinctions have to be made. As Christian Deritis puts it, students who “choose fields of study that are in demand” have an edge. As Kevin Carey and Erin Dillon put it, students with loans are well advised to keep their eyes not just on their fellow students but on “competitor nations.”

President Obama wants to continue “making investments in our people.” That seems like a salutary principle. Americans like to believe, with the President, that “we’ve got the best education system in the world.” Surely in some fields we do, and the United States consistently ranks highest for the number of top-notch research universities. (The celebrated Academic Ranking of World Universities compiled by Shanghai Jiao Tong University lists eight American univerisites as among the top ten in the world.) So yes, “we’ve got the best scientists and engineers and mathematicians in the world,” or at least some of them.

But the “investments” we’ve made and continue to make to achieve this kind of success ought not to be conflated with the way we have structured incentives for education generally. No one seriously thinks that “we have the best education system in the world” when it comes to K-12 education. Why we aren’t very good at it is a vexing topic, but it is clear that we aren’t—and among the ways we fail is our habit of inculcating intellectual apathy and proud mediocrity into the minds of millions of teenagers—and then urging them to go to college, often on the premise that a combination of public spending and student loans will carry them to a college degree and the likelihood of personal prosperity.

For some it works. For an increasingly large percentage it does not. If we are really to move forward with “making investments in our people,” we need to rethink what this means. Certainly sending large numbers of underqualified and marginally motivated young people to overly expensive institutions and loading them with unsupportable debt as they move forward is not the way.

This article originally appeared on August 5 at the Chronicle of Higher Education's Innovations blog.

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