Wednesday, June 20, 2007

On Student Loans

I owe the following insight entirely to Half Sigma. I repeat it here only because good memes deserve propogation.

Problem: The level of unpaid student debt is mushrooming. The pundit class's stated explanation for this is that other forms of financial aid have not kept pace with rising tuition costs. The unstated explanation is that, as reflected in the rising percentage of the college-aged population actually attending college, colleges are digging deeper into the left-hand side of the bell curve to find their students. These colleges then attrite these students or shunt them into academic disciplines (English, psychology*, etc.) whose economic value in the job market is, to put it charitably, open to dispute.

So the students graduate (or not), and then discover that they have sunk tens of thousands of dollars into something that has marginal impact on their earning power. But the loans still must be paid back, often at usurious interest rates, and cannot be discharged in bankruptcy.

Solution: The pundit class's proposed solution is for the federal government to increase financial aid to students. Of course, this financial aid is a bad investment in the social economy, and it doesn't become a good one when the government makes it instead of individuals. But it does accomplish two things the pundit class is predisposed to support:

- It increases the client base of the welfare state.
- It shovels greater sums of taxpayer dollars to the professoriate, the most reliable of liberal democrat constituencies.

I suppose someone could argue that the government is simply responding to market demand in the political economy: parents, out of ambition or class snobbery, refuse to believe that their pride and joy would be better off in something so proletarian as a trade, and will therefore take the loans or vote the public monies for that degree in poly-sci. Once a change occurs in public attitudes, parents and students will simply refuse to hire the money.

These attitudes may, in fact, be changing.** Call this the demand side of the equation. But I would also advocate addressing the supply side as well.

Student loans should be dischargeable in bankruptcy. As Half Sigma pointed out, a student graduating from college probably has little in the way of attachable assets. So to prevent every college graduate from declaring bankruptcy the day after graduation, this debt must not be dischargeable immediately. Some time period is necessary: 8 - 10 years should be enough time to pay back any student loan for any academic program that was a good investment in the first place. We might extend the time for students pursuing a medical degree, which doesn't pay much until residency is completed. But the principle is the same: if a college graduate has failed to make enough money to pay back his student loans after a certain time period, a reasonable observer should conclude that it was a bad loan, and it is cruel to pretend otherwise.

Colleges should be partially liable for discharged student debt. Colleges and lenders should cooperate to do several things: ensure that programs of study are economically viable; ensure that a student admitted into a program has a high probability of success; monitor student progress, both to ensure that students are demonstrating the aptitude for success, and to make sure that the student is receiving the necessary help to be successful. Colleges will resist this cooperation; they are quite happy with the existing regime, which manages a college for the benefit of the faculty, not the students. So to ensure cooperation, colleges must co-sign for all dept their students assume.

Economists should take a hard look at these proposals and make sure that they are not "gamable" from either end. But I do believe that they provide an outline of success.

Link Love: Trumwill writes an excellent post to women on how to talk to men about, inter alia, housework. It is exactly the post I would have written if I was smarter and wasn't writing about geeky stuff like student loans.

*I have some personal experience in this regard. My wife, like so many of our generation, was told by her parents, guidance counselors, et al., to major in something that "interested" her. So she majored in art and psychology.

Flash forward to age 30. As she prepared to get married to me, she was still not established in anything resembling a career, and she had $11K in unpaid student loans. Loans that her nerdy engineering husband had to set right.

On a positive note, she learned her lesson, and now tells our daughters that higher education is an investment in their financial future . . . and some investments are better than others!

**I have a nephew that majored in political science. He did so on a football scholarship, so mercifully he does not have any student debt. But he discovered upon graduation that a degree in poly-sci did not allow him to, say, move out of his parents' basement. The lesson was not lost on his parents, who steered his younger brother into a program leading to a career as an EMT.


trumwill said...

These colleges then attrite these students or shunt them into academic disciplines (English, psychology*, etc.) whose economic value in the job market is, to put it charitably, open to dispute.

I don't think it's accurate to say that the colleges are shunting the kids. It's not hard at all to get into a marketable field. Sure it might be difficult to get into a College of Engineering or College of Business, but there's still Social Work, College of Education, College of Technology, and a host of other opportunities available. It varies from school to school, but the barriers don't seem that high for the most part. People that majored in English and Psychology chose to major in English or Psychology.

On a sidenote, my wife majored in Psychology. Political science majors should be able to get jobs as teachers were it not for the teacher's unions and colleges of education. I looked into becoming a teacher and discovered it would take me longer to get teaching certification than it would to get an MBA. I still have a chip on my shoulder about that.

As far as attrition goes, you're largely right. Though it seems more common that they aren't kicked out of the university so much as they keep failing their classes and the student loans run out.

We might extend the time for students pursuing a medical degree, which doesn't pay much until residency is completed.

As far as student loans are concerned, a resident is still a student. My wife and I were not expected to start paying back her student loans until she left residency, so the 5-10 year rule would still apply.

I'd have to think about it some more, but I think your plan is potentially brilliant. One question: would they have to declare bankrupcy ten years after graduation or could they declare after 5 have to keep that portion of the debt for an additional five years?

Φ said...

Trumwill: Thank you for posting.

Allowing that "shunt" is a strong word, I will guess, without having any actual numbers in front of me, that far more students drop out of engineering to major in fuzzy subjects than do the reverse. This is the incentive structure that the educational-industrial complex has set up. The students may "choose" to switch majors, like they "choose" to take on massive debt to pay for it. But it is a poor choice, and a bad incentive structure.

My poly-sci degreed nephew is also working on his teaching certificate, on the grounds that there are few alternatives that don't involve significantly more schooling, for which he is in any case poorly suited.

My wife, until I, um, put her in a family way, was looking at social work as a career field. But she realized that its thrust-to-weight ratio, in terms of earning potential to schooling required, was unfavorable. Assuming that she could find a job in the urban areas in which we actually live.

I suppose that someone should be able to use bankruptcy to discharge their non-student debt under the existing rules, while being required to observe the waiting period for their student debt, and hopefully in the meantime finding a job that allows them to repay it. Somebody smarter than me, with more knowledge of bankruptcy law and game theory, will have to look at these kind of questions.

trumwill said...

I think what often happens is that they decide that since the professional track didn't work that they would have to go into something they were personally passionate about. They still have options even if they do fail out of engineering or business, though. As long as there's a College of Education, there's no excuse :).

I agree that student loan incentives are bad, though, since they are mostly indifferent to the practicality or marketability of the degree. Not always, though, my wife was able to get great interest rates on her medschool student loans because signing future doctors is a pretty competitive field. I don't know what other post-graduate fields of study that may apply to, if any.

whiskey_199 said...

I would not be sanguine about technical parts of higher education. Engineering and science are just as vulnerable to outsourcing as any other field.

In the computer programming field, most companies are now outsourcing most of their programming (IBM, Microsoft, Yahoo, Apple, etc.) or replacing more costly US citizens with cheaper (and perceived "smarter") H1-B visa holders. The previously cited companies along with Google, Yahoo, and Dell are big offenders.

Part of the "benefits" of globalization is cheaper wages and global competition for everyone, excepting those in hereditary positions: Hollywood, the media, finance etc.

You might be an EMT. But you can be easily replaced at half the cost with an illegal alien (don't laugh that's happened with police officers, and New Mexico wants to hire Mexican nationals for their police forces).

I suppose the lesson is to get as little debt as possible and find opportunities where ever you can. Teaching is pretty problematic since it's usually set by featherbedding and political machines. Being the wrong color, sex, etc. can pretty much rule out hiring.

Φ said...

Piggybacking on Whiskey's comment, I couldn't believe this video. (HT: Ace of Spades)