Wednesday, May 02, 2012

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.


Rory J. Regan said...

Your proposed "solution" to the college debt crisis is not only overly simplistic, but offensive as well. I'm working my way through graduate school right and have wracked up lots of loan debt in the process. My goal: serve my country as a diplomat stationed abroad. I've worked at a sandwich shop, taken internships to position myself better and generally tried to keep unnecessary expenses to a minimum. Still, I have 10,000s of dollars of debt to re-pay at very onerous interest levels, meaning I'll be stuck with a millstone around my neck for decades. I took the financial responsibility on and I intend to honor it, no matter how long that takes. But to suggest I - like many of my fellow students - are stuck in a debt predicament out of laziness,debauchery and "dining out" is a slap in the face. We're indebted because tuition inflation is soaring astronomically; in fact, it exceeds medical inflation. In my school alone, since 1981, tuition has skyrocketed by 623%. I know blaming students for perceived recklessness is a simplistic solution that probably makes you feel smugly superior, but it's 100% wrong. Get your facts straight, and don't be the first to cast a very unnecessary stone.

Scott Hinrichs said...

Re: Rory J. Regan

I applaud your industriousness and sense of honor. Please note that I did not primarily blame students for the problems promulgated by the higher ed system. You are unfortunately stuck in a system where government functionaries, private financial institutions, and higher ed administrators benefit greatly from sticking students with larger tuition bills and higher debt.

Diplomacy students are not expected to comprehend the intricacies of economics. But economically speaking, the government ... er, taxpayer money spent on higher ed institutions (including subsidies) in the name of making education more affordable actually ends up making education more expensive.

As you note, the result is that tuition is climbing at unsustainable rates. Unless something changes, higher ed will suffer a market rationalization similar to the 2008 housing market bust; although, that may still be a few years away.

My suggestions at the end of the post are intended to help students and their families avoid as much financial bondage as possible. Students are largely powerless to fix the system, but they can take steps to make the system less onerous to them personally.

You will note that I cited researched figures from Zac Bissonnette's book showing that the average student spends nearly enough in lifestyle choices as the average amount of debt incurred to obtain a bachelor degree. I'm sorry if this offends you, but no one is implying that you fall into this magic average.

Still, I stand by my assertion that anything one can do to reduce personal student debt load while still managing to obtain a valuable degree will pay off in more financial peace in the long run.

I encourage you to read Bissonnette's book for yourself rather than jumping to conclusions based on one blog post.

Rory J. Regan said...


I'm sorry that my tone was curt and disrespectful. You seem like a reasonable person and reasonable people can respectfully disagree, so I apologize that my post came across so vitriolic.

However, I do think your post - whether intended or not - strongly implicates students' profligacy as the major cause for tough, even unbearable debt loads, and that if students would just practice more financial prudence, then they can avoid the horrors of decade-long debt. You cite an unsympathetic letter from a Wall Street Journal editor that says as much.

I disagree; no matter how financially responsible I, or many others like me, behave, graduating without huge debt burdens is impossible. And these debt loads are lamentably unavoidable. For example, I can't realize my dream of a diplomatic career without my degree (by the way, I'm concentrating in international trade, so I'm well versed in economic dynamics) :)

I don't know who Zac Bissonnette is or how he computed his findings. But I know that his "formula" for graduating debt-free just won't work for legions upon legions of students. Skimping on alcohol and avoiding dining out won't make much of a dent in our loan burdens. It would be like the federal government cutting the National Endowment of the Arts or cancelling a weapon system as a way to solve our nation's persistent deficits.

I certainly agree that students must live frugally and do everything that they can to enter the real world with manageable debt loads. That's good advice. But it's not the cure-all. And your article strongly suggests it is.

Ultimately, I don't care whether the ultimate solution is a public or a private one. I just want students to get a fair deal. And right now, we're not.