What to Do About Skyrocketing Student Debt

It is commonly understood that different homes have different values, based on location, size, features, quality of construction, condition, etc. While we sometimes hear of figures such as the median home price, it is doubtful that anybody makes a home buying decision on such a basis. Home buyers evaluate each prospective purchase on its individual value. No one expects to get a $2 million mansion for $200 K.

Oddly, the same is not true of college degrees. We glibly use the lifetime earning differential between the average high school graduate with no college and the average bachelor degree recipient as justification for obtaining any college degree. It is as if many are ignorant of the fact that lifetime earning potential differs between degrees. (See results of Pew-Geogetown study on values of various degrees.)

Whether the degree's earning value is akin to a castle on a hill or a run down dump in a trailer park that should have been bulldozed 20 years ago, many simply assume that the degree will ultimately be worth its cost—and any associated debt.

We seem to inherently understand comparative value in so many other aspects of life. How did we become so economically ignorant about higher education? Part of it could be chalked up to social status. Just as nicer homes can be status symbols, so can college degrees. But I believe that our student loan program has also significantly contributed to this economic illiteracy.

The Wall Street Journal recently reported on college grads that are saddled with enormous student debt. One lady that studied interior design is in hock to the tune of $98 K five years after graduating. She's not even working as an interior designer. The vicious financial cycle caused by her debt burden could mean that she may never fully retire the debt during her lifetime. (Unlike other loans, student loans have no statute of limitations and can generally not be relieved via bankruptcy.)

While schools and lenders are now required to disclose more about the real costs of student loans, this largely amounts to more pages of fine print being shoved in front of freshly minted adults that are inexperienced in real life finances. These novices assume (as enforced by marketing) that their future income will permit them to easily retire any educational debt they incur.

The Standard Examiner calls for a reformation of the student loan program. But the real problem with student loans is the basic nature of the loans themselves. Low introductory rates are subsidized with taxpayer dollars. Higher ed institutions also receive many other forms of subsidies. A basic economic principle is that whatever is subsidized ends up costing more due to overuse.

This principle also holds true in higher ed. As reported by the Associated Press, 53.6% of bachelor degree recipients age 25 or under are unemployed or underemployed. Subsidies have skewed the higher ed market, offering perverse incentives to higher ed institutions and students. This has led students to incur debt to obtain degrees that are worthless in the labor market.

It's not unlike the bust in the housing market that has caused home prices to plummet, leaving many homeowners (some call them debtowners) owing more than their properties are worth. And like the housing bust, the government and banks have partnered to cause much of the problem.

The politicians and members of the higher ed industrial complex have predictably responded, as one philosopher put it, by calling for more fire extinguishers to combat a flood. They are calling for more government subsidies for higher ed. A few of these people may understand that this can only drive costs even higher. But all of them are primarily interested in serving their own interests. And offering educational subsidies still polls well.

Since the establishment will only continue to make matters worse until forced to make adjustments in crisis mode, each family sending students into the higher ed system must take matters into their own hands to avoid the debt problems many graduates currently face. Start by becoming educated about the real value of various degrees when considering which degree to pursue. Do you really want to spend $50 K to get a job that pays only marginally more (or perhaps less) than clerical work?

Next, ask whether student debt is necessary. In a letter to the WSJ editor, L.E. Culbreth expresses no sympathy for the financial mess in which indebted degree recipients find themselves, chalking their debt up to pampered college lifestyles. Culbreth writes, "I worked throughout my school years and finished in three years to avoid the extra year's room and board. I also didn't go on spring breaks, own a car or a bunch of electronic gizmos."

There may be something to Culbreth's contentions. In his book Debt-Free U, Zac Bissonnette provides a relatively simple old school formula for finishing college without debt, scholarships, or mooching off one's parents. It boils down to working one's way through college and living frugally while doing so.

Bissonnette cites research showing that lifestyle choices such as off-campus living, eating out, ordering in, alcohol, video games, cable TV, and vacations account for as much as 90% of the average student's education debt. By cutting out these extras and maintaining a reasonable part-time job, the need for student debt can be completely erased for many students.

This discreet approach may cause some social anxiety. The student is likely to be surrounded by others that are following the government's example of financing today's excesses with tomorrow's debt bondage (ostensibly in the name of having a full college experience). But the resulting peace of mind and future freedom will more than compensate for any associated cultural awkwardness. Refusing to run with the lemmings has its rewards, but it requires discipline.

In other words, each student needs to take responsibility for her own future financial peace. The establishment and the social structure will strongly push her to follow the well worn path to greater debt. But if one wants different financial results than the average graduate, one must make different financial decisions than the average student.

That may sound harsh. But it may also be the best lesson a student can learn in college.