It’s been obvious to most objective readers that the quality of the Wall Street Journal opinion section has been in decline for many years now. The latest from the site addresses the recent student loan interest rate hike, so I feel compelled to respond as I recently wrote a series of posts on the current state of student loans in America.
I think the easiest way to address the arguments in this piece is to go through them chronologically:
Government researchers continue to show that federal student loans are hazardous to both students and taxpayers. But Senate liberals don’t seem to care, as long as the money keeps flowing to their constituents in the nonprofit academic world.
As a first note, I think the rhetoric here makes it clear that the author is approaching this issue in an obviously biased manner. Needless to say, I haven’t seen any research that demonstrates that federal student loans are hazardous to either students or taxpayers. I’m not even really sure what that means.
A coalition that includes congressional Republicans, President Obama and moderate Democrats favors reform that ties the rates on student loans to the 10-year Treasury rate. This protects taxpayers from having to guarantee low fixed rates to students while the government’s own borrowing costs rise…Such taxpayer protections and borrower incentives are sorely needed…The Congressional Budget Office recently estimated taxpayer losses on student loans at $95 billion over the next decade.
Based on the WSJ passage above, you could be forgiven for thinking that the government was guaranteeing low-cost loans to students as the government’s interest rates rose, causing student loan losses. The reverse is true; government borrowing levels (such as the 10y Treasury note) are stuck far below the rate charged on student loans because of a weak economy. The weak job market, combined with excessively high interest rates charged on student debt is what leads to (projected) taxpayer losses. How cleverly misleading of the WSJ.
But in recent years an historic surge in student-loan debt is changing education for many borrowers from a winning investment into a staggering burden. Such debt has nearly tripled since 2004 and now hovers around $1 trillion, with defaults rising on student loans and other types of debt held by these young borrowers.
I’ve covered all of this before as well—the main point to remember here, is that college pays for itself (even if you take out debt) provided you get a degree and get a job. It turns out that for-profit colleges are particularly bad at graduating students, and those that do graduate have a particularly hard time finding jobs. Even though 10% of college students attend for-profits, these students account for 50% of student loan defaults. Amazingly, our enterprising WSJ author neglects to even mention for-profit colleges.
Another fact that the author neglects to mention is the unique labor-market situation; not only did the 08 Recession drive more people to college than ever before (driving up aggregate student debt), these graduates are finding it incredibly difficult to find high-value employment, primarily because of cutbacks in government consumption over the last 4 years. These factors work together to elevate the total level of student debt and the ability of students to pay back that debt. However, the importance of these factors should decline over time as the labor market improves.
Whereas credit scores used to be similar for young people with or without student-loan debt, New York Fed economists find a divergence after 2008. “By 2012, the average score for twenty-five-year-old nonborrowers is 15 points above that for student borrowers, and the average score for thirty-year-old nonborrowers is 24 points above that for student borrowers,” they note in a recent report.
This, while unfortunate, doesn’t seem like an apt comparison to me. For students that attend college by taking out loans, the alternative isn’t to attend college without taking out loans, the alternative is to not attend college and not take out loans. I would be curious to see the credit ratings of non college graduates compared to the credit ratings of college graduates with student debt as well as college dropouts with student debt. That is the appropriate comparison. Without conducting that comparison, we just know that relative to not having debt, having debt is bad. (Which seems obvious).
Liberals apologize for the price hikes imposed by their friends in the faculty lounge by pretending that universities are starved for revenue. Rep. Frank Pallone (D., N.J.) claimed on MSNBC on Saturday that “the federal government is not making the investment in higher education.” Perhaps he’s forgotten that annual Pell grant spending of $34 billion has roughly doubled in the Obama era, or that Uncle Sugar now originates more than $100 billion in annual loans…Both public and private nonprofit institutions grew revenue per student faster than inflation in the period from the 2005-2006 academic year through 2010-2011. And their spending also increased faster than inflation. As ever, increasing government education funding to students is pocketed by universities in the form of tuition increases.
So the college cost issue is a bit more nuanced. Yes, it’s true that the DOE is loaning out 100 Billion this year to students…that isn’t necessarily what I think Democrats mean when they say ‘invest’ in education—I, for one, would rather see the money go to colleges and universities so that they don’t have to raise tuition as much. Pell grant increases aside (the increase in funding was a one-off expenditure passed as part of the fiscal stimulus), states have cut per-student expenditures by an average of 28% since the start of the Recession—hardly a picture of “increasing government education funding” being pocketed by Universities. The decline in state subsidization has been almost perfectly mirrored by a 27% rise in student tuition at public Universities (along with cuts in spending to offset the remainder of the cost differential).
On the flip side, colleges do continue to spend and spend…this is primarily driven by private, non-profit institutions that are competing for high-ability students. Using private gifts, sophisticated price discrimination to charge tuition, and endowment gains, these elite Universities are able to continue to increase spending/student without driving up student costs; indeed, net tuition and fee payments at private institutions have fallen since the onset of the Recession. Given the extremely high demand (that is impervious to cost) for a degree from any one of these top schools, it seems unlikely that these schools will slow their spending anytime soon. In order to compete with these elite schools, public universities have also continued to increase spending; unfortunately, the incidence of this spending has fallen on students over the last 5 years as states have cut funding. Moving forward, there will definitely need to be some structural changes in how state universities spend their money—I have some ideas about what that could/should look like, but this piece is already long enough and that isn’t really relevant to the discussion here. Suffice it to say that it is entirely misleading to argue that the increase in college expenditures is being driven by federal student loans.
A policy disaster that results in rising costs, taxpayer losses and overstrapped borrowers is now manifest. So naturally this week Senate liberals will bring to the floor a plan to ensure that the policy continues unchanged. Rates on subsidized Stafford loans would stay frozen at the 3.4% rate that prevailed before a July 1 expiration, with new taxes to sustain them…Liberals would be happy to accept an even lower rate, or expanded loan forgiveness that shifts more of the losses to taxpayers, or more grant money instead of loans. Anything that doesn’t exert downward pressure on the cost of college is apparently on the table
I’m sorry, but before (at the top of the article) the author seemed to be in favor of lowering interest rates on student debt by marking them to the 10 year treasury rate. That plan would lower average rates even more than the Senate plan, which continues the prior interest rate policy where only a small sub-section of undergraduate borrowers could borrow at 3.4%, and everyone else was forced to borrow at 6.8% or higher. The author doesn’t ever really resolve this inconsistency. Additionally, it’s very unclear to me how increasing the student loan interest rate will exert downward pressure on the cost of college. If demand for college were price-sensitive, we would see decreasing numbers of students enroll as tuition increased; instead, we’ve seen the opposite trend over the past 5 years (and, more broadly, the past 30). Additionally, since when is it optimal public policy to dis-incentivize potential college graduates by making college more costly?
That is just the most ridiculous thing I have ever heard. There are such positive benefits to a college degree both for the individual (more than $500,000 in increased earnings over the course of a lifetime) and the government (positive externalities from a more educated workforce in terms of innovation, civic engagement, and increased tax revenue from higher earnings combined with fewer social welfare state payouts from a higher earning population) that we should be doing everything we can to make college affordable and make sure students graduate—trying to drive down the supply of potential college graduates by raising the cost of college financing is a curious educational policy to achieve that end.
No one should be surprised that one of the chief sponsors of this anti-reform bill is Senator Elizabeth Warren (D., Mass.), not even a year removed from her membership on the Harvard faculty. During the August recess she can expect a warm welcome in Cambridge.
Of course the author ends with a completely random, nonsensical dig at Elizabeth Warren. I’m not sure that the author realizes this, but Harvard could easily fill its entire freshman class with students whose parents could afford to pay the sticker price tuition out-of-pocket. Probably several times over and probably with an even more expensive sticker price. Instead, Harvard does its best to select a class with representation from every income distribution (it could do better here, but still), and Harvard greatly subsidizes the cost of education for those students—11% of Harvard’s undergraduate class receives Pell grants, and the average net price for low-income students is $1,297 (page 12).
Now, all of this isn’t to say that the student debt market works perfectly, or even that it functions well, or that there aren’t serious structural issues with the rising cost of college education. All of these areas could be improved. However, if you want to start a discussion about higher education policy in the US, you can’t just leave out a significant portion of the problem (for-profit colleges) and you most certainly need to get your basic facts right.