Dealing with student loans

By Felix Salmon
September 3, 2009
Anne Marie Chaker's story is a little bit too alarmist, I think, but there's still a serious problem here:

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Anne Marie Chaker’s story is a little bit too alarmist, I think, but there’s still a serious problem here:

Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion.

What Chaker never even hints at until much further down in the piece is that a lot of this is good news: students are moving from expensive private loans to cheaper federal loans. But the fact is that young students are not very good at judging what’s a reasonable amount of debt for them to carry. The dean of Hofstra University has it right:

“I don’t know if we can take it for granted that a 22-year-old knows what it means to borrow $100,000,” said Nora V. Demleitner, the dean of Hofstra Law School, where enrollment is up a relatively modest 5 percent. “They look at the $100,000 in loans, and then they look at the $160,000 salary. And they think, ‘Well, that’s not so bad.’”

At least with mortgages, people have a reasonably good idea of how much they can afford to pay back. With student loans they don’t — especially not with something like a law degree, where either you get that coveted $160,000 job as a first-year associate, or you don’t. And if you don’t, you’re very unlikely to make anything like that kind of money, and your student loans are likely to dangle over your head for decades hence.

There’s a strong case to be made that the government should not be in the business of making it easy for students to go massively into debt even when their chances of repaying that debt are slim. It’s not hard to come up with anecdotes such as this:

Lillian Russell graduated from law school at the University of Pittsburgh last year with $181,000 in debt from her seven years in school. She has spent much of the past year looking for work. In recent weeks, she found a job clerking at a small law office. While she settles into her job, she has deferred payments on most of her federal loans, though interest continues to accrue.

“I wish I had considered the long-term impacts of what I was getting into,” Ms. Russell says. When she entered school, “the idea was I’d take out the loans, get a job, and pay it back,” she says.

Realistically, most graduates from the University of Pittsburgh law school are not going to waltz into $160,000-a-year jobs: Russell’s experience, where she’s clerking for something close to a normal living wage, is surely quite normal. It’s ridiculous that colleges can charge pretty much whatever they want, and the federal government will always be there to provide loans. One good way of decelerating the inflation in tuition fees — and the concomitant rise in student debt — will be for the federal government to start getting much stricter about the kinds of sums it’s willing to countenance.

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Comments
25 comments so far

Just like NNT says. Build a world that is more robust to forecasting errors. Right now we are doing the opposite and the errors will get bigger

Posted by James | Report as abusive

At least a law school graduate has a some chance of earning enough money to eventually pay it back.

What about students who obtain degrees (including graduate degrees)in professions dominated by no wage/low wage jobs? Anthropology, Art History, Social Work, or Teaching.

Can an entry level social worker or teacher support a $150,000 student loan debt?

Posted by Brad Ford | Report as abusive

How is moving to government loans good news? A great proportion of student loans made at current tuition levels have no prayer of being paid off. The student who takes out the loan is going to default regardless, so why is it good news that we now have the government (read all of us) taking the hit instead of private lenders.

Posted by Ledbury | Report as abusive

Here’s a novel idea for a new kind of student loan: the borrower can opt for a very low (possibly negative) interest rate in exchange for granting the lender the option to convert the loan into a claim on a certain percentage of the borrower’s lifetime earnings. Say Lillian borrows $100k. If, after graduating, Lillian has trouble finding a job, she can defer payments on the loan for up to a year or until she finds a job, whichever comes first. If she does land a plum job, she can either start to make payments on the loan or (at any time) prepay, but not without giving the lender notice and the chance to exercise its option to convert the $100k loan into a claim on some percentage (say 50bps) of her lifetime taxable income. That is, each year she’d have to submit a copy of her tax return to her lender to facilitate enforcement.

Underwriting would be tricky for sure, and it’s susceptible to all sorts of information asymmetries, and it might be illegal… but it has some appeal.

just wait until inflation kicks in… that 100k loan will be peanuts

Posted by dvictr | Report as abusive

The English student loan system is worth mentioning here. The problem Felix raises is one of uncertainty – students don’t know how much they’re going to earn after they graduate, so they don’t know how big a loan they can afford. (Unlike mortgage applicants, who already have jobs.) The English system effectively ‘backstops’ this risk completely.

After you graduate in England, you only pay back the loan after you start earning above a certain threshold (£15,000). Then you pay 9% of all income above that threshold, until the loan is repaid. It’s basically a graduate tax, but it only lasts until you pay back the loan.

If you haven’t finished paying off the loan 25 years after you graduated, the debt is forgiven. So if you never get that high earning job you thought your degree would bring, you don’t have to pay back anything.

This system is fantastic for young borrowers: If university pays off for you, then you pay back the loan. If not, you don’t.

The down side, of course, is that it’s expensive. It costs the government well over £20 for every £100 lent, which is pretty steep. But if you want more graduates, and you want to attract poorer kids into universities, it’s going to cost money one way or another.

Oh, and did I mention we also massively subsidise tuition fees…?

University of Pittsburgh….yuck.

How the hell did she expect to score a white-shoe Wall St. biglaw job out of that school? Was she delusional?

Posted by jvriebeeck | Report as abusive

I’m always puzzled that a country would wish to saddle its young workers with considerable debt at the beginning of a period in their lives when they will likely make the most investments ever. They get married, buy a house, get children. If a huge debt is a reason to delay getting into a serious relationship, buying a house or having children society loses. Even if the loan is paid back eventually.

At the same time the children’s parents will be entering their most prosperous times. The last 10-15 years before retiring you earn most and your expenses are least, children have left the house, the mortgage has been paid off. I know lots of parents will invest lots of money in their children, but that’s not what is being promoted by the state. They say: you can do almost anything you want, but it’s going to cost you (interest payments). And thus children of well-off parents have a considerable edge over others. Lower class young people work at a young age and start their lives. Rich young people don’t really have to worry about the investment in their education. But the middle-class youngsters are being squeezed out.

Posted by Marc | Report as abusive

One needs to choose one’s major very carefully. Some are basically worthless as investments. And do we really need more lawyers?

If I had to do it over again, this college boy would learn a trade. Once your apprenticeship is done, you’ve got a valued and portable skill. You can also work off the books whenever you want (not that I’m advocating tax avoidance).

Posted by Mike | Report as abusive

I’m going to venture a heretical opinion here: more debt among young people is a sign of progress, not of dire social calamity.

That may sound mad – British young people graduate these days with around £25,000 of debt, when their parents generation (on average) had virtually no debt at the same age. Isn’t that a sure sign that today’s young people are worse off?

I’m saying no. The low average debt back in say, 1965, was just a sign that almost no-one went to university (9% of young people), and those that did were rich. Back in 1965 it was also almost impossible for a young person to ‘borrow’ against their expected future earnings. Either your (rich) parents supported you at Uni, in which case you went, or they couldn’t afford to, in which case you didn’t.

Banks wouldn’t touch you, because you had nothing to act as ’security’ on a loan (on a mortgage they can repossess your house, but on a university loan? You can’t offer to become an indentured slave to the bank if you failed to meet repayments).

In other words, the vast majority of potential university students were massively ‘credit constrained’. There was a profitable trade to be made between you and the bank – ‘You lend me money to study, I’ll earn more in future and pay back the loan’ – but the risk was too high.

Today, in contrast, we have a generous system of student loans (described in my earlier comment), accompanying the massive rise in participation. The upshot is that young people are in much more debt than they used to be – but that’s overwhelmingly a *good* thing. Because more of them are going to be graduates, they’re going to land (and create) higher paying jobs, in higher value industries, boosting GDP and taxes.

So there it is. Student debts (with a sensibly designed, government backed student loan scheme) are a good thing.

I’m in more debt than my parents were at my age, but I’m also earning more than they ever did. In the long run, I’m pretty sure I’ll come out ahead…

@Brad

I think you addressed Felix’s point. Someone planning to be a social worker or teacher should *not* choose a school at which they would incur $150,000 in student loan debt.

Posted by ab | Report as abusive

@ Pockets
The argument you make for student loans (you start with more debt, but you’ll come out ahead because you’re going to earn more) is perfectly true on an individual level with everything else staying the same. In aggregate though, it doesn’t work. If half the people go to university an get a degree there is no chance that they will earn collectively substantially more than they would have if only few people got a degree. It’s a law of supply & demand. If more people with a degree are available, the difference the degree makes in the salary they can command is going to be much less significant than if only 10% of the people graduate.

Debt though, sticks. And it’s unforgiving. And it has real effects on peoples lives.

Posted by Marc | Report as abusive

Hey Marc,

Normally you’d be right that an increase in the supply of something (like graduates) would reduce its price. But during the 1980s and 1990s something amazing happened, in both the US and UK – the supply of graduates increased massively, and *at the same time* their wage premium went up.

That may sound like it breaks the laws of supply and demand, but it doesn’t (I’m an economist by trade!). What happened was that the supply of graduates increased hugely, but the demand for graduates increased even more. All things were definitely not held equal…

Something about the spread of computers (which make educated workers much more productive) meant that businesses literally couldn’t find enough graduate workers – despite so many more people going to university. This bid up graduate wages – a phenomenon economists call ‘skill-biased technological change’. It meant that we really could ramp up university attendance *and* have increasing graduate salaries.

The economists Claudia Goldin and Lawrence Katz call this ‘the race between education and technology’. During the first 80 years of the 20th Century, the supply of educated workers outstripped demand. But since 1980, technology has ‘overtaken’ education – meaning the growth in student numbers hasn’t been anything like fast enough to bid down graduate wages. (See their book here: http://www.amazon.com/Race-between-Educa tion-Technology/dp/0674028678, or just type ‘skills biased technological change’ into Google Scholar for tonnes of free papers on this.)

In fact, despite the explosion in higher education in recent years, the graduate wage premium has never gone back down to its pre-1980 level. It’s stopped racing upwards so fast, but it isn’t falling.

Of course, this really sucks for non-graduates, as their wages fall ever further behind those of college graduates. It’s one of the leading explanations for growing income inequality in the US and UK over the past few decades.

But that’s all the more reason to help as many young people as possible into university/college. A more productive economy isn’t a zero sum game…

The irony of the increase in student debt is that, in a way, it’s actually the cause of the very rise in costs that make it necessary.

Here’s the problem: both demand for and supply of quality university education are inelastic. Demand is such because it’s essentially non-optional for any white-collar job, and supply because universities are largely non-profit (the good ones, anyway). In that situation, increases in price increase the need for financing, which in turn increase the population’s willingness to pay (i.e. demand), and that in turn leads to an increase in price. Of course there’s more intricate economics at work than this, but that’s a good summary.

Suggestion to the government: get out of the business of cheaply financing student loans and spend that money founding new universities or increasing the capacity of existing ones.

Posted by Mike Nute | Report as abusive

The same dynamics of the housing market are the same as the student loan market. Easy credit inflates things until they pop. Law students borrow more and more chasing prices higher until the returns just collapse. In a larger sense its a metaphor for the US.

Posted by James | Report as abusive

I think Mike Nute is on to something: subsidize something with easy credit, the price rises.

An interesting aside, I’m reading a novel set in 1960-2, and some of the characters teach at a college and several times its pointed out how little they make. Here in this burg, all the highest price homes are those within walking distance of the local college. Tuition rose something like 4.2% this year and articles noted this was the smallest increase in 30 years.

Posted by Bob_in_MA | Report as abusive

bob in ma, if you think tuition increases have led to faculty salary increases, may I suggest that you spend less time with the output of right-wing think tanks.

I’ll offer my own annecdata: after five years in a tenure-track job, starting around 50K, my salary has increased by about 5%/year. I spent twice the time in grad school it would have taken to get a law degree. And I have a better gig than the VAST majority of humanities PhDs….

Posted by nick | Report as abusive

The problem with the government NOT getting into these high-end loans is that high-end educations will increasingly be restricted to children from wealthy parents, even further stratifying a society that is already moving dangerously in that direction.

@ Pockets

While it may be that the benefit of having a degree still reflects well on the salary one can command after graduation (because of the race between education and technology) there is no guarantee that this will remain so in the future. But again we are looking at it on an individual level, which is not quite right. Loading young people up with lots of debt has side-effects that are undesireable for society. People put off buying homes, marrying and having kids. For more info about this:
http://www.profam.org/pub/fia/fia_1912.h tm#fn1
It would be better for society to subsidise education outright (at least up to a far higher level than is custom in the US). Education then becomes a ‘free’ choice for persons (i.e. delay starting to work in the hope for a higher cumulative pay over the entire carreer or start sooner but risk getting paid less over time). The expenditure of funding higher education would easily be recouped through higher tax income (because educated people command higher pay). This will enlarge the pool of people that will consider higher education, to the benefit of all. It would also remove doubts about people ‘buying’ degrees because a degree can then only be ‘bought’ through studying hard, rather than a high school fee (and or studying hard). Funnily enough people are willing to pay much for something scarce that isn’t really worth much, but they are not prepared to pay a low amount to something available to all that isn’t really worth much.

Posted by Marc | Report as abusive

“The problem with the government NOT getting into these high-end loans is that high-end educations will increasingly be restricted to children from wealthy parents, even further stratifying a society that is already moving dangerously in that direction. – Posted by Benedict@Large”

For high wage jobs (doctors, engineers, etc.), you might have a point. For low wage jobs, I have to disagree.

While Harvard might have the best undergraduate Education Department in the US, a propective elementary school teacher would be substantially better off getting his her degree at a state school.

If my wife (an elementary school teacher) had $100K+ in student loan debt, a “high-end education” would be a curse.

Posted by Brad Ford | Report as abusive

Student loans haven’t always stuck to debtors, even those in bankruptcy, like glue.By allowing students to take out massive loans they had no intention to pay. But over time, this exception has evolved to include private student loans.

Realistically, most graduates from the University of Pittsburgh law school are not going to waltz into $160,000-a-year jobs: Russell’s experience, where she’s clerking for something close to a normal living wage, is surely quite normal.

Oh, most graduates finish their degree with a huge debt. This debt, unless they have fortunate parents will takes years to pay when and if they begin their chosen career. The issue is often these young people cannot find employment and therefore the debt remains unpaid. This further adds to the cycle within the economic school systems.

Posted by Anonymous | Report as abusive

Oh, most graduates finish their degree with a huge debt. This debt, unless they have fortunate parents will takes years to pay when and if they begin their chosen career. The issue is often these young people cannot find employment and therefore the debt remains unpaid. This further adds to the cycle within the economic school systems.

Posted by Anonymous | Report as abusive
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