Government Spending

May 15, 2012 By Guest Blogger

The Picture Worth A Trillion Dollars: Inside the New Debtor’s Prison—and the Key Out

By Charles C. Johnson

“Boys and girls go to college to get more knowledge,” goes the old rhyme, but can they afford it? In our “knowledge-based” economy, it’s getting harder and harder to get knowledgeable, as higher education is priced higher and higher. 

Student loan debt in the United States is rapidly approaching $1 trillion, and so ubiquitous are student loans that they aren’t just for young people anymore. Indeed, of the estimate 37 million Americans with outstanding student loan debt, nearly 5.5 million are 40 to 49 years old, and more than 6.3 million are 50 or older, according to the Federal Reserve Bank of New York. For all student loan borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.

That might not seem like a lot—roughly the price of a brand new Prius—for a degree that may add over a $1 million to overall lifetime earnings, but retiring the loans may prove hard especially in a sluggish economy with diminished job prospects. Five million Americans are delinquent on their loans and ironically, one of the fastest growing sectors of our economy, is debt collection, as defaults have more than doubled since 2003, to $67 billion annually. Nearly one in 10 borrowers who started repayment in 2009 defaulted within two years, the latest data available, double the rate in 2005.

Something must change, especially as more and more students are relying to debt financing to pay for their education. Today, 94 percent of students who go to college borrow to pay for it—up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. As state governments are decreasing the size of their subsidies, more and more students are relying on the federal government—which has its own problematic finances—to finance their education. As an example of how bad the trend has gotten: if nothing changes through 2016, the average cost of a public college will have more than doubled in just 15 years, according to the Department of Education.

The increasing involvement of the U.S. Department of Education comes at a steep price, like few private alternatives to the federal government’s supposed generosity. “If you default on your student loan, you’re subject to a penalty up to 25% of the amount in default,” writes David Kaplan of Fortune. Though few college students pay that usurious rate today—those 800,000 defaulting students who did pay a penalty in fiscal 2011 paid an average of 6.7%—there’s no reason they might not pay it in the future.

It’s fair to say that college debt represents the modern extension of debtor’s prison, with a twist. Even if you die, you can’t get out of debt. The debt will simply be transferred onto your parents. And it may not even be worth it: A 2011 study by Richard Arum of New York University and Jospia Roksa of the University of Virginia found that “45 percent of students show ‘no significant gains in learning’ after two years in college.”

There are better solutions for higher education policy, beginning with the government exiting the loan business entirely. Banks and investors ought to be the ones offering loans, says Nicole Gelinas of the Manhattan Institute. She’s right. Lenders could access “students’ own credit, job, and grade histories” and perhaps even majors. Why, after all, can’t creditors discriminate against certain majors and in favor of others?

Here’s still another idea: in effect, we treat education as if it were a bond, or a debt security. We ought to treat it as if it were a stock, where investors buy a stake in individual students as if they were a company. The more promising the student, the better the valuation; the better the valuation, the more likely we will build real education and real skills.

• Students

• Education

• Borrowing

• Debt

• loan

• college

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