Higher education is expensive. This is not surprising because of the inherent costs incurred by education providers that need to be passed on to their consumers and because higher education is a valuable good. That having been said, increases in tuition rates have outstripped the rate of inflation in recent years, which has fed a rise in the amount of student loan debt that undergraduates have incurred to fund their educations. Recently, this issue has received increased attention and it merits a public policy response, particularly because attaining an undergraduate degree is a prerequisite for merely entering into the labor force at a certain level.
Here are some basic facts gathered from a recent report from the Pew Charitable Trust’s Project on Student Debt and from a 2006 report from the American Association of State Colleges and Universities:
- In 2008, 62% of graduates from public universities had student loan debt, 72% of graduates from private non-profit universities had student loan debt and 96% of graduates from private for-profit universities had student loan debt.
- Average student loan debt burdens increased 24% from 2004 through 2008.
- In 2008, at public universities the average debt was $20,200 (20% higher than 2004), at private non-profit universities the average debt was $27,650 (29% higher than 2004) and at private for-profit universities the average debt was $33,050 (23% higher than 2004).
- In 2006 the average graduate from a state university owed $17,250 in loans, when ten years before the amount was (adjusted for inflation) $8,000.
- These numbers actually understate the problem, because they do not include all private (non-federal) loans that students carry. Also, usage of credit cards or other forms of debt to pay for student living expenses are not included here.
Such debt inherently limits the freedom of students to choose the sorts of majors or activities they might otherwise want to participate in, because of the need to get a degree and to build a resume that is geared towards finding a job that can pay for student loan debt. Furthermore, such debt burdens create long-term economic hardships for new graduates by lowering their disposable income and their standard of living, limiting their career options and career mobility (which is not beneficial from an efficient labor market standpoint), and by making it more difficult for them to save for a home, retirement or their own children’s educations. Also, it has been suggested that such debt creates a disincentive for young people to marry and have children.
Given all these issues, what can be done from a public policy standpoint? There has been recent activity on this through legislation signed into law by the Obama Administration to increase Pell Grants, to eliminate fees paid to private banks to act as loan intermediaries, and to cap repayment levels above a certain minimum income and living allowance level. Also, under this legislation, loan balances will be forgiven for people who keep up their payments and are involved in public service work, including military service.
These are all good steps, but I’d suggest one more that can be taken. Another public policy step would be to allow student loan debt to be dischargeable in bankruptcy. Such debt currently is not dischargeable, except in rare circumstances, and this creates the current problem of people who are essentially bankrupt being forced to continue with this loan debt. The obvious response is that if we allow discharge, this will make it harder for some students to get loans because lenders will see them as a higher risk because of the ability to discharge. That may not be such a bad thing. While we want to maintain loan opportunities and not shut out students from the student loan market, there needs to be some sort of balance and realism injected into the process. One may certainly argue that it does no one any good for students to be provided tens of thousands of dollars in government-supported non-dischargeable loan debt for schooling situations that, under the cold light of a lender’s analysis, are unlikely to provide the sort of income that would justify large-scale debt. It is true that for some students, such an analysis may mean they don’t get a loan, but this may not be the worst thing in the long run, particularly in light of recent experiences in our economy with other kinds of debt.
There are two other possible objections to allowing discharge of student loan debt that should be noted here. The first is that allowing discharge might encourage more young people to declare bankruptcy. While this is a possibility, one should remember that bankruptcy is a harsh remedy and as such one shouldn’t assume that young debtors would seek it out as anything other than a last resort. Further, if lenders become more careful in vetting debtors because of the possibility of discharge, presumably this would mean the pool of debtors that receive such loans would be less likely to become overextended. The other objection relates to fairness, namely the justification for allowing discharge of student loan debt when other obligations, such as child support payments or back taxes, generally are not dischargeable. I would suggest that student loan debt is similar to other forms of loan debt which are dischargeable, and fairness would dictate treating it like such other debt. Also, student loan debt differs from obligations that either arise from the need to support children and prevent them from becoming dependent on the state (like child support) or that arise from basic legal requirements of society (like paying taxes).
The current student loan system has serious incentive problems and consequences. Qualified students should not be discouraged from seeking higher education and the student loan market provides a necessary service for financing such education. However, some policy changes should be made to avoid making a legacy of large-scale debt to banks or the government an inevitable part of higher education.