Questions About U.S. Student Loan Debt: Thursday Focus for June 19, 2014

Cardiff Garcia: The growth of US student loan debt: causes and consequences: “Both rising tuition and a higher share of students borrowing…

…have contributed just as much as higher student enrollment…. A recent New York Fed report:

Between 2004 and 2012, the number of borrowers increased by 70% from 23 million borrowers to 39 million. In the same period, average debt per borrower also increased by 70%, from about $15,000 to $25,000.

And… Brookings….

From 2002 to 2012, inflation-adjusted (2012 dollars) college costs—defined as the sum of room, board and “net tuition” (tuition costs after subtracting federal, state, and private [non-loan] aid, as well as any discounts offered by the institution)—rose by 41 percent within public four-year institutions, by 9 percent for private four-year institutions, and actually fell 7 percent for two-year public institutions… average college costs rose by about 16 percent….

Furthermore, there is evidence that many students and households don’t understand what they’re getting themselves into…. That’s the background against which Obama is now proposing a plan to expand the number of borrowers who can cap their loan repayments at 10 per cent of their income, along with endorsing a bill that would allow more students to refinance at lower rates. (The latter is unlikely to get through Congress, as the proposed budgetary offset is the proposed closing of loopholes for the wealthy. Republicans are already pushing back.)

From $350 billion to $1 trillion in student debt in the eight years from 2004-2012 is an extraordinary increase–so large that even though I have checked and re-checked I cannot help but fear that somewhere an apples-and-oranges comparison has crept into the mix.

It also very strongly suggests that the marginal borrowers do not have a handle on what they are doing. If it made no sense for borrowers to take out more than $350 billion in debt in 2004–if the marginal material and psychological benefit of college then was no greater than the marginal burden of debt repayment–then it really makes no sense for borrowers to take out $1 trillion in debt in 2012. Either of them are little borrowers in 2004 we’re irrationally scared of taking on student debt loads, or them are total borrowers today are much too blasé about the burdens–and by “marginal”, we mean all those holding all the tranches between $350 billion and $1 trillion.

As I have said before, the key questions are: how likely are those taking on the extra debt to actually finish their B.A. degrees in a reasonable amount of time? How quickly can we move from a regime of fixed repayments to one of income-contingent loans (or, as Aaron Edlin points out, a more attractive system of income-contingent grants)? And how then do we manage the borrowing-attending decision when potential students no longer fear landing in permanent debt peonage?

My instinct is that Clark Kerr had it right: that the best compromise is to make education free for those willing to devote the time, but to make students borrow to cover their living expenses. That treats getting educated as having positive externalities broadly understood equal to the cost of education, and my guess is that is the right order of magnitude. But that is only an instinct.

These are not questions that I can answer with clarity and confidence, or even on which I can guess in a relatively informed manner. So: a question for the internet: who should I take as my guides, and whose analyses should I trust on these questions?