By Barry Poulson
American students recently passed a milestone—$1 trillion in student debt. Interest rates on federal student loans are scheduled to double on July 1st. Coupled together, these two developments have many people asking what lawmakers can do to make college affordable for more people.
The President and the House have competing plans to prevent the hike while making those rates more market-based. The White House wants to allow more borrowers to defer payments and not make payments in full. That plan would increase the number of borrowers eligible for ‘Pay as You Earn,’ a program that caps payments at ten percent of prior year earnings, with any remaining balance forgiven after 20 years.
Over the past decade alone, total borrowing per student increased by 56%. Students on average accumulate $23,000 in debt, and 3% of students end up with more than $100,000 in debt. But more and more students don’t appear to be enjoying a return on that growing and leveraged investment. The delinquency rate on that debt has been rising and now exceeds 11 percent.
A growing number of students who graduate from college with a degree or credential end up unemployed or underemployed. In 2009, 17.4 million graduates were working in a job that did not require a college degree—representing more than 35 percent of college graduate employment. And repaying loans is increasingly difficult for graduates who are unemployed or underemployed, or who earn low incomes.
New research by the National Center for Education Statistics (IES) shows that this debt is especially burdensome for students who don’t complete a degree or certification program. In 2009, 19 and 46 percent of students—those at private nonprofit 4-year colleges and universities and those at public 2-year and all for-profit institutions, respectively—fell into that category. Federal student loan borrowing rates among this group ranged from 25 to a whopping 86 percent. And non-completers were more likely to be unemployed or underemployed, which of course affected their earnings and ability to repay the loans.
An affordable college loan is one that you can afford, and many college students can’t afford the federal loans they have accrued. The federal student loan program has created a large group of overeducated, unemployed, or underemployed borrowers who will spend much of their working life paying off student loans or defaulting on them.
The federal government should get out of the student loan business, including government guarantees of student loans as well as direct lending. Proposals to further incentivize students to incur federal debt to finance their post-secondary education through subsidized interest rates, deferred payments, or loan forgiveness are misguided. Those policies would increase borrowing and saddle a new generation of student with debts that are unmanageable.
The private credit market is better at intermediating student loans just as it is for other consumer credit. It does so through price discrimination. i.e. lending to credit worthy borrowers at lower interest rates, to less credit worthy borrowers at higher interest rates, and excluding the least credit worthy borrowers from loans at any interest rate.
A college education is not for everyone, nonetheless many will argue that we should increase access and expand opportunities for a college education, especially to those who cannot afford it, on the grounds that there are social benefits to college education over and above the benefits that might accrue to college graduates in the form of better jobs and higher earnings. More than a half century ago Milton Friedman challenged this social benefit argument and questioned whether government subsidies to higher education are a good investment. Further, Friedman argued that if higher education is to be subsidized it should be through a student voucher plan rather than through direct subsidies.
If the federal government is to subsidize college students it should replace the student loan program with a voucher plan. All direct federal subsidies to higher education could also be redirected to a student voucher plan. With devolution of the voucher plan to the states much of the federal bureaucracy in higher education would be eliminated.
The precedent for this reform in government subsidies to higher education was set in Colorado’s College Opportunity Fund (COF). More than a decade ago Colorado replaced much of the direct state subsidy to higher education with this voucher plan. Colorado offers a voucher to offset tuition costs for qualified Colorado residents. The vouchers are paid per credit hour with a maximum number of subsidized credit hours equivalent to an undergraduate degree. The vouchers can be applied to tuition at private as well as public universities. Higher education institutions in Colorado combine this voucher with needs based grants to expand opportunities for low income students.
If the federal government provided a matching voucher for vouchers financed by state governments, such as the COF, this would create incentives for more states to rely on this more efficient and equitable form of subsidy. Students would have more choice in higher education. They would also have an incentive to invest the voucher funds wisely by making progress toward and completing a degree in order to qualify. Vouchers would create a more competitive playing field for private and public colleges and universities. They would have to compete in offering students better opportunities to invest their voucher funds. Direct subsidies to higher education would disappear, and with it the unrelenting increase in higher education costs tied to higher salaries for college professors and administrators. Programs that have little to do with educating college students, such as bloated athletic programs would also disappear.
Higher education institutions would begin to look more like the centers of learning envisioned by Thomas Jefferson when he created the University of Virginia. UVA might again turn out scholars and statesman rather than professional athletes, what a radical idea.
Barry W. Poulson, Professor Emeritus, University of Colorado Boulder; Past Commissioner to Colorado Tax Commission; Member of Taskforce to Reform PERA (2005).