Colleges Should Pay a Fine When Students Default

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June 11 2014 10:04 AM

Student Debt Isn’t the Problem. Colleges Are.

We need to make universities responsible for their students’ outcomes.

Student debt accountability starts with the universities.
Student debt accountability starts with the universities.

Photo by Shutterstock

If you borrowed money from the federal government to finance your education and you’re having an extremely hard time paying it back, I have good news for you. President Obama has just signed an executive order that expands eligibility for Pay As You Earn, a newish program that caps the monthly debt payments of eligible borrowers to no more than 10 percent of their monthly income. And if you still have outstanding debt after 20 years, or 10 years if you work in the public sector or for a nonprofit, it will be forgiven, like a youthful transgression.

You crazy kid! Remember when you thought taking on this student loan debt made sense because getting a college education meant that you’d eventually earn enough to pay it off? Oh gosh. Those were the days. Clearly you had been passed the peace pipe once too often.

Cutting debt payments for cash-strapped borrowers is a nice gesture. In 2008 and 2012, Barack Obama fared well with under-30 voters, and Pay As You Earn will give some of them a nice little boost, just in time for the midterm congressional elections. But there is a much larger problem that the president’s feel-good proposal fails to address, which is the fact that people who take on federal student loan debt aren’t earning enough to pay it back. America’s higher education institutions aren’t offering value for money. And that’s a problem that tinkering with the federal student loan program won’t solve.

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To state the obvious: Borrowers can’t handle their debt payments because of the general weakness of the economy. It would be far easier for borrowers to repay their student loan debt if they weren’t unemployed or underemployed, and it would be easier still if they were employed in jobs that offered robust wage gains over time. Yet the debt crisis also reflects the corruption of mass higher education in America.

You’ll notice that I’ve been referring to borrowers and not to college graduates. There’s a good reason for that. A large number of the Americans burdened by student loan debt never actually finished a degree. I can’t give you an exact figure because, until recently, the federal loan database didn’t actually track completion. What we do know, however, is that those who complete degree programs tend to earn substantially more than those who don’t. The college wage premium, or the ratio of the median hourly wage of college graduates and that of those who’ve only graduated from high school, increased at a fast clip in the 1980s and the early 1990s, but it’s been hovering around 1.8 for the past several years. That is, college grads have a median wage 80 percent higher than high school­–only grads. The premium for those with “some college” has been stuck between 1.15 and 1.2 for about 30 years.

Some of these noncompleters will be eligible for help from Pay As You Earn, and I’m sure many will be grateful for it. The fact remains that even in this best-case scenario, noncompleters will still be obligated to fork over one-tenth of their often quite modest incomes to loan servicers. There goes at least half of your wage premium.

I know what you’re thinking. “Well, Reihan, the real problem is that college isn’t free. If colleges didn’t charge tuition, we wouldn’t have to worry about student debt.” That’s true in the most literal sense. But if the public sector is picking up the tab for higher education, so are all taxpayers, whether they’re college-educated or otherwise. Do we have good reason to believe that the federal government will do a great job of whipping colleges into shape if it controls the purse strings? Some smart, thoughtful people, like Sara Goldrick-Rab and Nancy Kendall of the University of Wisconsin, seem to think so. Take a long, hard look at federal programs like Medicare and you might think differently.

Granted, there is a strong case that higher education is a public good that generates positive spillovers, which is to say benefits that aren’t captured by the individual actually getting the education, and so I definitely think that there is a place for subsidies. Yet there are limits to the subsidize-everything-that-moves strategy. Right now, federal student aid subsidizes attendance at any accredited college at virtually any price. The result is that students have no way of knowing which colleges offer the best bang for the buck, and colleges have little incentive to get better at actually serving their students. By declaring that taxpayers will pay for just about anything labeled “higher education,” whether or not it translates into skills that young people can actually use, we have entrenched the worst aspects of the higher education status quo, from wasteful spending to a borderline criminal indifference to the well-being of students—particularly the poorest, most vulnerable students.