The twin problems of rising debt and falling wages for college graduates

by Grace

This graph shows the twin problems of rising student debt and falling wages of college graduates.

There are no easy solutions to the problem of rising student loan debt, but a more healthy economy would probably help the overall situation.

Sen. Dick Durbin (D., Ill.) has introduced legislation to make private student loans dischargeable in bankruptcy, making them similar to most other types of debt.

Consumer advocates and groups representing universities support the bill, saying that the threat of bankruptcy would spur private lenders to work out better terms with borrowers when they run into trouble. Bankruptcy lawyers are lobbying for the change, which would generate new business for them.

But banking-industry groups, including the American Bankers Association and the Financial Services Roundtable, oppose the measure, saying it would tempt students to rack up big debt that they won’t repay. “The bankruptcy system would be opened to abuse,” the industry groups said in a letter to the Senate Judiciary Committee last month. Critics of the Durbin measure also say lenders would respond by charging higher interest rates on student loans to account for the increased risk of losses.

Durbin’s bill would have minimal effect since more than 90% of all student debt is provided by the federal government.  Another idea being discussed is to allow federal loans to become dischargeable. That does not make sense to me since it would put taxpayers on the hook for the deadbeats who first easily qualify for the subsidized loans and then later decide paying back the money is just too hard.

Getting federal student loans is too easy.  Anyone able to get into college, some with ridiculously low admission standards, can get a federal loan.  With about one-third of college freshman taking remedial courses, much of this loan money is being used for high school level classes.

Reform is needed to reduce waste while still making sure deserving students get the financial assistance they need to attend college.  Here are a few ideas that might help.

  • Impose a college readiness test before allowing anyone to get a student loan.  Even requiring a minimum SAT score would be better than what we have now.
  • Exceptions to the college readiness test can be made for low-income students, allowing them one year to use federal loans while taking college prep courses at community colleges or online schools.  It may sound harsh, but if a person lacks the tenacity and academic background to become ready for college in one year, then taxpayers should not continue to subsidize their education.   Since less than a quarter of students who start in remedial courses go on to graduate from college, this one-year rule could prevent many sad instances of young people lacking degrees but still burdened with large student loans.
  • Better disclosure of future payment obligations should be required.  If a student was more clearly informed about the monthly payments and number of years needed to pay back the amount he was borrowing, he might be less likely to borrow without considering the long-term financial implications.
  • Apply more stringent restrictions on all schools, not just the for-profit colleges.  One idea is to impose a “gainful employment” rule that makes a college ineligible for further loans if the default rates of its graduates are excessive.  Another idea floating around is to make schools responsible for paying back part of any loans defaulted upon by its students.  Under our present system, schools bear very little accountability for the massive loan amounts they authorize.
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20 Responses to “The twin problems of rising debt and falling wages for college graduates”

  1. Well, if we drastically tightened eligibility for aid based on academic readiness, the existing pool of federal (and state) funds could provide more grants for fewer students instead of loans for the masses. I’m definitely with you on limiting eligibility.

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  2. How about not subsidizing student loans for anybody who is going to be taking remedial coursework?

    I know the cost of community college varies, but I believe that with Pell Grants and the generally low cost of community college, that low income students are rarely taking on debt for community college. In fact, with Pell Grants and CC, there may be money left over after paying tuition. Community college really is something that you can pay your way through, given enough time. The main issue with CC is finding the time while fully employed and dealing with grownup problems.

    My parents’ prize employee (whose high school motto was “D is for diploma!”) is working her way through CC on her own dime, with occasional small “scholarships” from my parents.

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  3. “How about not subsidizing student loans for anybody who is going to be taking remedial coursework?”

    I really agree with this, but listed the exception in my post in the spirit of compromise. 🙂

    I agree that going part-time to CC is almost always affordable except for those with particularly challenging life circumstances. And I think many of know someone like your parents’ prize employee, slowly progressing through CC without government aid. I can think of someone who just earned her associate’s degree, after several years of slacking off and having just barely graduating high school. If you’re motivated, you can do it.

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  4. CC’s will only remain affordable as long as taxpayers (usually county level) continue to subsidize them. With so many cutbacks, though, they are bound to go the way of public 4 year schools, which have all raised tuition quite a bit.

    I think public colleges at all levels should be heavilly subsidized by taxpayers and employers too. The situation we have now, with students and families paying for the bulk of the education, leads to the problem of entitled students who are more interested in amenities and student clubs than in education. Back when I taught at a public u, in a state where half the cost was picked up by the government, and employers were paying for a lot of the students, attitudes were very different. I think employers should pay into a special education fund, since they benefit so much from college education. That would also give them a way to have more say in educational content.

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  5. “The situation we have now, with students and families paying for the bulk of the education…”

    I think you have to figure student lending into that picture. These families are by and large not paying 100% cash. At least at the point of purchase, they’re using Monopoly money. It’s not real until they have to pay with real money–i.e. their money. The existence of no-questions-asked student lending distorts the nature of the purchases being made, just as 0% down loans for homes and cash-out home refinancing encouraged the popularity of stainless steel, granite, marble, homes so big you can lose family members, and regular kitchen remodels.

    Also, there is a fairly direct relationship between the real estate bubble and the ability of families to pay steeply rising tuition costs, namely the existence of HELOCs and cash-out refinancing. Although the second mortgage has traditionally played a role in paying for kids’ college, the housing boom allowed ordinary families to pull six figures out of their home equity, which lessened resistance to paying rapidly growing tuition costs.

    http://www.mainstreet.com/article/moneyinvesting/education-planning/should-you-pay-college-heloc

    “student clubs”

    There’s a lot of good in student clubs at the college level, perhaps even more so than in high school. They teach leadership, organizational skills, people skills and provide opportunities for college students to interact with real people from the adult world, not to mention teaching real world skills and providing service opportunities. (Habitat for Humanity is a huge big deal on our local campus.)

    Admittedly, the question, “When do these people find time to study?” has occasionally crossed my mind. This spring, a neighbor reported that a certain fraternity was practicing a music and dance routine for 4 hours straight in a nearby parking garage.

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  6. “The situation we have now, with students and families paying for the bulk of the education, leads to the problem of entitled students who are more interested in amenities and student clubs than in education. ”

    I’m not convinced that making people pay for the bulk of their education causes entitled students. Furthermore, I’m pretty much fine with students deciding how they want to spend their education dollars. The problem is that many are spending taxpayer money for a significant chunk of their education.

    There is a problem in that schools are producing college graduates unprepared for college-type careers. But if students are spending their own money and have to find out the hard way that this doesn’t make sense, then maybe their behavior will change.

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  7. Maybe many families see student loans as Monopoly money because it’s so easy to qualify for these loans. Lenders are much more strict in qualifying borrowers for car loans, so these have to be taken more seriously.

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  8. “I also have trouble understanding why families, sophisticated families in many cases, would see a student loan as Monopoly money. Do they feel the same way about car loans?”

    People are morons about car loans, too, but the lender has the option of repossession, and the buyer has the option of selling the car. (You would not believe how many people are driving around in cars that are worth more than they make in a year.)

    Lots of people (including high earners) are very unsophisticated about money and credit. I’ve seen even very smart middle aged people seduced by the idea that somehow they are getting away with something when they are approved for a large business line of credit or a dubious home mortgage. In reality, being approved for a loan is no more of an honor than getting approved for a large tape worm. (Pardon the image.)

    I think the average human mind has a hard time dealing with something as abstract as money, and particularly the further abstraction of credit. When you are spending with credit, it requires a lot of discipline not to think of it as somehow “free money”.

    “Things have gotten worse and worse over the years as students pay more and more of the share themselves.”

    I think the percentage that they are paying up-front in cash is the important number, not the total cost that they will eventually be paying (which is totally unreal to the 18-year-old mind). When my dad and his siblings were going to college in the late 60s/early 70s, their private college cost $1600 for the year (I think) and they and their parents paid for the whole thing, 100%. (The state option, University of Washington, was only $1,000 a year at the time, I believe.) In my dad’s case, his summer earnings covered most of his tuition costs, with his parents picking up the rest. The college food was terrible, though, and the campus rules were often onerous (mandatory chapel, no coed dorm visiting, and initially no pants allowed for women–very chilly in Seattle).

    The fact that they were paying for college largely by themselves did not make my dad and his brother and sister entitled. I wonder if the whole entitlement thing isn’t in part caused by the fact that practically everybody can get into some college these days, and a lot of them do. It isn’t a special privilege these days, which encourages the customer mentality. It’s not a privilege, anymore than being allowed into Burger King is a privilege.

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  9. Here’s another example of the good old days.

    When my dad was in college at Seattle Pacific College (now SPU), freshmen were issued special beanies at the beginning of the year that they were obligated to wear. This was a very stigmatizing piece of clothing and (if I’m remembering correctly), upper classmen had the right to accost freshmen and variously humiliate them. It was officially-authorized hazing. (The internet says that the beanie-wearing went extinct in the early 70s, which was right around the time that female students got the right to wear pants.)

    Just try to imagine trying to cop an attitude about a grade while wearing a stupid-looking beanie!

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  10. My dad was a married undergrad by 1969, so $1600 was probably late 1960s. It was a very small, obscure private college and Seattle wasn’t trendy or upscale in the 1960s. That was pre-Microsoft, pre-Californians, pre-espresso, pre-Amazon–the Dark Ages.

    Of course, it’s possible that $1600 was just one term. In either case, my dad was able to earn the majority of his tuition money with summer jobs.

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  11. I had a hard time finding much about SPC’s freshman beanie traditions on the internet, but I found the following at a University of Central Arkansas web page on their beanie in the 1960s. From an actual 1960s UCA handbook:

    “[The beanie] is to remind you that you are no longer one of the most important people on the campus. You are in college now. You are among hundreds of people who were important on their respective high school campuses. Here you are starting on an adventure that is completely new to you and therefore you are a ‘green freshman.’ The beanie is colored green especially to remind you of your status on this campus.”

    “Pat Otto, a UCA freshman in 1962, and current Outreach Coordinator of Alumni Services at UCA, wore a beanie her freshman year. When asked if she wore the beanie on a regular basis, Mrs. Otto said, “Absolutely, because I knew I would be humiliated by the upperclassmen if I was caught without it.”

    http://thecabin.net/news/2012-04-08#.T84worBfGV0

    That was a totally different world.

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  12. I’m enjoying the beanie stories. I seem to remember movies or TV shows with college students wearing beanies. Here’s a photo. http://www.digitalhorizonsonline.org/cdm4/item_viewer.php?CISOROOT=/ndshs-dm&CISOPTR=176&CISOBOX=1&REC=3

    I wore a beanie as part of my Catholic school uniform back in the 60s.

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  13. “Things have gotten worse and worse over the years as students pay more and more of the share themselves.”

    I think the entitlement issue has more to do with the declining college standards. Plus, as college simply becomes unaffordable for more people, who’s going to be able to pay for worthless degree. Can it simply keep going up forever? I don’t think so, and employers may begin to accept other credentials.

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  14. I disagree. The bright students are just as entitled. BTW, did you read the story in Chronicle about online cheating? The students who came up with that scheme were clearly bright, and clearly did not care if they learned anything in the course.

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  15. I think it is the smart students who drive me the craziest. Not all of them – some really want to learn. But way too many could care less. When it is a student who is smart and who clearly has all the advantages – not supporting a family, not working at an outside job – well. I have no sympathy when he/she still just wants to slide through doing the minimum. And I see way too much of that. Students who wait until the night before on a major project, even though I have been reminding them for weeks about the project, and then complain that I am not responsive because I didn’t answer their pleas for help at 3am and didn’t give any extension. Students who complain that I tested on something that wasn’t explicitly on a Powerpoint slide. They are everywhere, and my colleagues at the elite SLACs complain about it too.

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  16. “I seem to remember movies or TV shows with college students wearing beanies.”

    Ditto. I also believe that part of the beanie tradition at my parents’ college was that upperclassmen could stop freshmen and require them to sing a short ditty about their lowly freshman status.

    I found another page devoted to the history of freshman hazing, this one at Ripon College in Wisconsin.

    http://www.ripon.edu/library/Archives/exhibits/decades/frosh.htm

    Here’s a photo caption:

    “The continuation of freshman hazing is evident, as this picture dates to 1948. Freshman young women are shown kissing their green beanies at the approach of presumably an upper-classman.”

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  17. My husband’s oldest sister was at UConn in the mid 60’s (she is a lot older than he is) but does not remember beanies. She does tell stories about curfews and dorm mothers, though.

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  18. “She does tell stories about curfews and dorm mothers, though.”

    Switching from dorm mothers to RAs was a pretty big cultural shift.

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  19. Bonnie, it doesn’t surprise me that the smartest students are as entitled as the rest. If I were a smart college kid and saw the low standards for performance, I might develop just that attitude. Why the heck should I work hard when everyone else is getting by doing so little. The entitlement and the cheating are probably both similar in that if you see others doing it, you are more inclined to engage in similar behavior.

    I’m thinking of a particular high school situation, where low standards mean that the “smart” hardworking students might get A’s and the “dumb” lazy students might get B’s even though the difference in the real achievement level between the A’s and the B’s might be very wide. It’s a potentially corrosive culture, and I can see negative behaviors arising from it.

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