Some Thoughts on the Student Loan Debt Problem

The student loan issue is increasingly coming the front-burner, both domestically and abroad. I haven't blogged about it before (and it's worth noting how little scholarship there is on student loans compared with say mortgages or credit cards). So here are some initial thoughts by way of encouraging a less muddled conversation on student loan debt.  

1.  Student Loan Debt vs. Cost of Education. We need to distinguish between the problem of student loan debt and the cost of higher education. They are intimately related, of course, but as far as I can tell, the problem is less anything about the structure of student loan debt than its amount, which is a function of the cost of higher education. There's no question that education costs have and continue to grow faster than inflation. Why is more complicated. Before we prescribe austerity in higher education as the solution, however, let's recall that US higher education is the envy of the rest of the world. Foreign students come here for their advanced degrees, not vice-versa. There's huge social value produced by having outstanding domestic higher education. There's also a lot of unnecessary expense (I'll name names when I'm good and ready, though, as that isn't really the issue here).  

2.  U.S. student loan debt is often structured differently from other consumer debt.  It's important to recognize that student loan debt is quite different than other types of consumer debt. A lot of student loan debt can be deferred for substantial periods and can be repaid over extended terms.  All of this is to say that student loan debt is unlikely to cause a sharp liquidity problem for a consumer by itself. When combined with other debt and impairment of income, the story is different. 

3. Student loan debt isn't especially expensive.  OK, let me start with some caveats.  That's a first impression from eyeballing some loans, and it doesn't apply to for-profit lenders.  But as far as I can tell, the bulk of student loan debt isn't crazily expensive in terms of interest rates. It's large dollar debt, rather than high rate debt, and of course it doesn't go away easily. The low rates are at least partially because of government subsidization, but the low rate, large amount issue that goes back to the first point--our problem is more the cost of education than the cost of the debt.

4. International variation. We need to recognize that there is HUGE variation internationally in how education is financed and the structure of student loans. We should be looking very hard at how other countries finance student loans.  

5.  Legacy Debt vs. Future Education Costs. We need to distinguish between the question of what to do with the existing stock of student loan debt and what the education financing system should look like going forward.  Even if we make higher education completely affordable henceforth, we have a massive stock of student loan debt.

To this end, I don't see reforms like changing the bankruptcy dischargeability of student loan debt as being real gamechangers. In a totally efficient world, nondischargeability should have translated into lower credit costs and thus into higher tuition rates. (Bankrup'cy Bob and I are all over this issue, right Bob?) 

6.  Why not equity financing? Why we are financing education via debt? It's not obvious that we have to do so, and that's the easiest way to avoid leverage going forward. Milton Friedman proposed equity financing some years back, meaning that the school got a % of future income, rather than a fixed amount. It could be as progressive or regressive as a school wanted.  

Yale tried such an experiment in the 1970s, but with poor results--the alumni didn't pay.  Yale didn't want to sue its alums, and let them convert to debt at a favorable rate. But that's an easily surrmountable problem--we could have education payments rolled into tax bills and collected by the IRS, which would then remit to the schools.  Non-payment isn't stiffing the school.  It's stiffing Uncle Sam, who is much better at collecting.  It's not such a radical idea--Australia collects student loans via its tax service.

There's an entrenched education bureaucracy that would have a lot of trouble changing to an equity financed system (alumni fundraising would surely suffer, for example). But it would mean that people take the jobs they want, rather than the jobs that pay the student loans. That might be a very good thing for society, even if it would certainly hurt some employers (think those who pay recent graduates outsized "hazard pay").