Student loan crisis puts higher education in a pickle

Published 1:30 am Saturday, December 8, 2018

The philosopher David Hume, often wrote about economics, as did his longtime friend, the moral philosopher Adam Smith.

Hume had a particular distaste for public debt, which he saw as an existential threat. He once described it in Armageddon-like terms, writing, “Either the nation must destroy public credit, or public credit will destroy the nation.”

It is interesting in that light to see the contrast in how we view public and private debt today. Private debt is looked at as potentially toxic, so it is monitored closely and both community leaders and financial markets cluck over the latest reports of its growth. Public debt, on the other hand, is viewed as a necessity, part of the price of living in a developed economy.

As of Dec. 4, the Treasury Department reported our total public debt as $21.8 trillion.

Most people find numbers in the trillions difficult to grasp, probably because we have nothing in our physical world that we can easily relate it too. They are, in a way, like imaginary numbers in math — useful for calculations but with no anchors to our daily lives. Unfortunately, the unreality of the numbers makes it easier for us to ignore them. So we do.

Private and public debt are not totally separate entities, even though we see them in different lights. One of the most worrisome areas of private debt, for example, directly involves the federal government as well as the public debt.

More than $1.5 trillion worth of federal student loans are outstanding. The total is growing rapidly, and the loan system itself is being described by Education Secretary Betsy DeVos as “in crisis.”

Excluding home mortgages, student loans are now the largest and fastest growing form of household debt. So, when the system is “in crisis,” we had best pay attention.

Surprisingly, the symptoms responsible for her diagnosis do not include loan defaults, which have stabilized and even declined a bit, at least for the moment. She says, “…if we as a country do not make important policy changes in the way we distribute, administer and manage federal student loans, the program on which so many students rely will be in serious jeopardy.”

In today’s political world of shout-outs and breathless declarations, the word “crisis” is overused. In the case of student loans, then, if you prefer “it’s a mess” to “it’s a crisis” we needn’t worry about accuracy. There is enough to fill both descriptions.

Government’s reputation for mismanagement is legendary, and it didn’t take an extraordinary effort for them to screw up the student loan system. It was foredoomed by a thoughtless design from the opening bell. The original plans for the student loan system were apparently drawn up by people who had slept through their basic economics classes. They had no idea of the predictable market distortions that result from subsidies.

Blaming the current crisis on President Barack Obama’s decision to eliminate the private sector participation and take total control of the loan program is inaccurate. It didn’t help, but it really only made the system’s faults more visible. His concern was that the private lenders were “cherry picking” and thus avoiding the defaults. By bringing all loans under the federal umbrella, the government’s overall default rate would go down.

He wasn’t wrong; the private lenders were “cherry picking” in the sense that they were paying more attention to how loans would be repaid. But at bottom the government takeover was a cosmetic change to the program and did not address its fundamental economic flaw.

That flaw was straightforward enough. Our higher education institutions were pricing themselves out of the market. The student loan program provided a $1.4 trillion hidden subsidy — an artificial flow of tuition-paying students and cash to support an educational system whose costs were clearly out of control and growing faster than either the economy or inflation.

The result, of course, was that higher education’s costs for students continued to rise. DeVos reports that 70 percent of the recent growth in total student loans came from students borrowing more. Only 30 percent came from the growth in the number of student loans made.

Higher education is in a pickle. It is dependent on a student loan program that is in crisis, and also in a vortex of two toxic forces: accommodating the shrinking academic preparedness of entering students, and the expanding “consumerism” of giving students the level of difficulty and educational experience they want.

The system is clearly unstable, and in economics, something that is unstable will inevitably change. In the student loan and higher education case, we can either change it ourselves, or watch it change on its own. It’s our choice.

James McCusker is a Bothell economist, educator and consultant.