For the last seven years, I've been a student — first an undergraduate and then a law student. While pursuing my degrees, I racked up thousands of dollars of debt, and I'm just now beginning to really understand the consequences of it. Throughout the process of determining whether to attend college and grad school and which schools to attend, I lacked a significant amount of pertinent information. Most of my friends had similar experiences.
My generation's experience with higher education suggests that it is a system that is riddled with market failures. As a result, I am happy that President Obama recently put forth a plan to intervene in the college decision-making process. But the president's plan does not appear to do enough. Student debt imposes significant burdens on our country and it will continue to do so unless steps are taken to ensure that young people fully understand student loans and prioritize the factors that make higher education a good investment.
The Debt Problem
The statistics on student debt are astounding. Over the past eight years, the amount of student debt has grown over 300%; Americans now owe more in student loan debt than credit card debt. In addition, almost one third of all federal student loan borrowers have either defaulted on their debt or are in deferment or forbearance. While alarming, these statistics do not come close to fully capturing the scope of our student debt problem.
Young people have typically been our country's entrepreneurs; they have few responsibilities so are willing to take big risks, start new businesses, and contribute to economic growth. However, debt dampens this entrepreneurial spirit. Burdened with large student loans, young people cannot afford to be entrepreneurs, rather they feel compelled to put their heads down and work a steady job. There's nothing wrong with this approach but there is no denying that it is less conducive to growth and innovation.
Student debt also impacts the major life decisions that young people make. In recent years, more and more young people have decided to move back in with their parents rather than start their own households. Of course, our economic crisis has played an important role in this decision, but student debt is also a major factor. Young people must cut costs in any way they can in order to ensure they keep up with their debt obligations. This dynamic undermines efficient job matching; whereas a young person may be most productive in a job in Minneapolis, she may choose to live in Cleveland because she can live at home and stay current with her loan payments.
With a preoccupation on paying student debt, young people also spend less. A strong argument can be made that this isn’t such a bad thing. Young people are forced to become more frugal and develop responsible spending habits. But, less spending by an entire segment of the population can also have damaging effects, especially during economic downturns.
A Flawed System
When you go to the store to buy a box of cereal, you walk down an aisle with countless options. Most of us have a good understanding of the different types of cereal available. We all know what we’re getting when we pull a box of Fruit Loops off the shelf. We also know exactly what we’re giving up when we check out: $3.88 (the price of a box of Fruit Loops) is something we understand. Because consumers have good information about cereal, can compare products, and understand cost differences, this market works.
In contrast, the market for higher education doesn’t work. When we’re deciding what college to attend, we don’t know "what's inside." As a recent graduate, I can attest that we often don't even know what to look for when it comes to colleges.
Our college decisions are based on subjective and sometimes irrelevant standards, such as which schools have good reputations, exciting sports teams, and nice facilities. I chose my college because friends and adults I knew told me it was a good college. While I consider myself lucky because my school ended up being a good investment for me, I know several friends who were far less fortunate.
Important metrics such as employment outcomes, average debt burden per student, faculty to student ratios, and size of career counseling offices are rarely considered when young people choose a school. This is largely because: 1) such metrics are often not transparent; and 2) 18 year olds don’t know how to value these metrics.
It's difficult to blame students for failing to value these metrics. They haven't gone to college before or been educated about the ins and outs of college so they have little information about what factors make college a good investment.
Prospective students also have no real idea about what they're giving up when they decide to attend a college. Young people are well known as having high discount rates — we don’t value or really even think about the future. If we can’t comprehend the consequences of a tattoo of a "cool" tribal symbol, what makes you think we can understand the consequences of $60K of debt in four years?
Lastly, higher education occupies a privileged place in our society, preventing many people from critically analyzing their decision to attend college. For example, a four-year college program is equated with success while community college, trade schools, and alternative paths connote failure. This leads to universities having a high demand for their product regardless of the price of tuition.
All of these dynamics free institutions of higher education from the restraints of the market. Colleges as a whole can charge excessive prices because the social value placed on higher education guarantees a large demand for their product. In addition, since young people cannot tell the difference between the quality of various colleges, competition doesn’t check colleges' behavior. An institution can be disproportionately priced and still attract students because students don’t know they should flock to a different school. Therefore, colleges are able to provide a product that does not comport with the price charged, causing tuition and student debt to rise.
A Way Forward
In recent weeks, President Obama has put forth a plan for addressing our college affordability issues. He has proposed the use of a college scorecard that ranks schools based on some of the metrics noted above — a strategy geared towards filling the information gap. To further ensure that colleges have the right incentives, the president has suggested providing more federal aid to students attending schools ranking high on the scorecard.
These are positive steps but more is needed. The existence of a college scorecard will not automatically lead to young people valuing the metrics that determine whether a school is a good investment or cause young people to understand the consequences of student debt. Real, substantive education is needed or else the current flawed approaches to picking schools will prevail.
Young people must be shown what student debt looks like and how it will actually affect the rest of their lives. We must educate young people on how to choose a college. This education can be provided through high school courses devoted to the college decision. Federal aid can be conditioned upon completing such a course. Government savings in the form of reduced financial aid costs would likely more than justify funding for the courses.
Efforts are also needed to ensure young people approach the decision on whether to attend a four-year college with a more critical eye. Community colleges, trade schools, and apprenticeships may be much more valuable than a four-year university for some individuals. A public campaign geared towards combating the stigma associated with these pursuits can help facilitate a more productive level of demand for certain forms of higher education.
There is no silver bullet for solving the problems afflicting our system of higher education. But, my credit score and I are glad the discussion has commenced.