Further Thoughts on Student Loan Debt

I had to wake up early to tend to some BBQ I'm slow cooking overnight. While up, I checked around to see if the internet was still awake. It was.

I checked on Brad's blog. While over there, I saw that Mark asked me a question about student loans. I started writing an answer, but it turned out to be too long for the comments, so I posted it here.

Mark, if you've made it this far, welcome to my little corner of the internet, and here's my answer to your question about student loans:

My entire life, I’ve heard everyone in charge (parents, politicians, administrators, professors, etc.) insist that there is insufficient funding for education and that having a college degree is the pathway to a better life. That's certainly true, but only to a certain extent, and only at a certain price.

But as any economist will tell you, when you subsidize something you get more of it than you would otherwise have; and the price of what you're subsidizing will rise. Accordingly, we've all (as a country) agreed to subsidize the cost of going to college since we all think it's such a great thing. We have subsidized it too much.

The ocean of student-loan money artificially boosts the cost of tuition, which creates a new cycle of indebtedness by students. How else to explain the way in which the cost of college tuition has outpaced the rise in the price of almost every other measurable good. Higher tuition makes “pay-as-you-go” a less-likely option. Think about it. Do you know anyone who pays for college "as they go" by working? It's just not possible to earn $25k over the summer when you're 18 years old. I bet that some of y'all actually used to "work your way through college". That's now impossible. Look at this chart:

Sure enough, when you have a credit bubble, you're going to start increasing the amount of debt. Student loan is higher than all other types of loans (except mortgages).

How is college subsidized? Student loans. How easy is it to get a student loan? About as easy as it was to get a subprime home mortgage in 2003. Anyone remember how that ended?

Soft student loan requirements make it easier for colleges to spend money poorly. The federal government provides a loan to virtually anyone who applies for one, which enables university administrations can spend foolishly (which they do).  There’s so much money, why not hike salaries and pensions for professors? Why do you think there are so many college administrators now? Why not offer programs and majors that are of questionable intellectual or economic merit? Why not offer beautiful, expansive "health club" like gym facilities for the students?

I know people with six-figure loan debt, multiple degrees and few job prospects. There were few lending standards – hey, it’s free government money – so they took on loan after loan. The lenders kept making loans. Other friends of mine used loans to gain useful degrees with lucrative job potential, but they still came out of school with a huge load of debt that will take decades to repay. Guess what it's harder to do when you have a big student loan: buy a house, buy a car, save money to get married and have kids. I'm lucky. I got a great job as a lawyer, and I'm able to repay my debt.

But I would almost have to say that the group only 5-8 years behind me isn't going to do as well. It's really hard to find good jobs out there to support your student loan debt. Here's that previous sentence in a chart:

The consequences of the student loan bubble are pretty far reaching. Remember, this debt isn't dischargeable in bankruptcy, so it's there forever. A decision you made when you were 18 to borrow $125k to major in "Gender Studies" at Wellesley is going to follow you around until you die or pay it off. Why do you think so many young people have left the labor force, taken part time jobs, and/or moved back in with their parents? It's the combination of high student loan debt and a lousy economy.

So, that's my answer as to why it's the principal - not the interest - that's the real problem with student loan debt.