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.
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.
Consider the findings of Paying for the Party, a masterful account of the many ways life at a large Midwestern flagship public university is rigged against students from working- and lower-middle-class backgrounds. Over the course of five years, the sociologists Elizabeth A. Armstrong and Laura T. Hamilton tracked a group of female students at “Midwest University,” a thinly disguised big public flagship school, starting in their freshman year. One of their most striking findings is that standard college advising consistently failed to meet the needs of students from modest backgrounds. Students from affluent backgrounds had extensive social networks at their disposal, which helped them turn degrees in “party majors” like sports communication and broadcasting or interior decorating into jobs in glamorous, or glamorous-sounding, fields. Students who didn’t have parents familiar with the ins and outs of higher education to help them navigate the system found themselves at the mercy of incompetent, indifferent, and overworked advisers who routinely led them astray.
Many of the students profiled by Armstrong and Hamilton thus wasted precious dollars, and precious years, taking courses that ultimately proved useless to them. It was this opportunity cost—the wasted time these young women might have spent learning something useful elsewhere, at a school that actually gave a damn about them—that is the real tragedy at the heart of Paying for the Party. It’s not clear that making Midwest University tuition-free would suddenly make its administrators more attentive to the needs of their students. If anything, it might ease what little pressure there is now to offer value for money.
So what can we do to address the many ways higher education is failing young Americans? A good first step would be to punish colleges that have failed their students, as Andrew P. Kelly and Alex Pollock of the American Enterprise Institute have suggested. The basic idea is that if a student defaults on her student loans, the higher education institution she attended should pay a penalty. The genius of this idea, as Kelly has explained, is that it would make colleges think twice about their lackluster advising, even if the penalty were quite small. Colleges would suddenly have an excellent reason to guide students to majors that would help them gain marketable skills. The usual objection to this notion of giving colleges more “skin in the game” is that colleges would become extremely selective to minimize the risk of default, and this in turn would deny large numbers of students the opportunity to get an education in the first place. The reality is that the vast majority of America’s higher education institutions are nonselective, and colleges that refuse to even try to educate students who need competent guidance would quickly find themselves out of business.
More broadly, we’d do well to rethink higher education from the ground up. Thinkers like Kelly and New America’s Kevin Carey often talk up the importance of breaking down the barriers to entry in higher education—of making it easier for new higher education institutions better-suited to the needs of today’s students to get up and running, and to compete with existing colleges that are failing to offer value for money.
Anya Kamenetz has gone even further in “$1 Trillion and Rising: A Plan for a $10K Degree,” a report from the think tank Third Way that offers a step-by-step roadmap for transforming public higher education. While Kamenetz appreciates the importance of lowering tuition, she emphasizes institutional reforms that would also lower the cost of high-quality instruction. Among other things, she envisions “cohort colleges” that offer students who need the most help intensive advising and instruction designed to help them meet their educational goals and short-term pop-up schools that would meet the lifelong learning needs of working students looking to learn specialized skills. Flagship schools, meanwhile, would be transformed from elitist bastions that take pride in their exclusivity to educational innovation hubs, where resources would be devoted not just to teaching students lucky enough to be on campus full time, but also commuters educated at satellite campuses throughout the state.
I get why President Obama is talking about student loans. Telling your voters that you want them to keep more of their own money is always a political winner. Just ask every Republican since Jack Kemp. And the president has, to his credit, made occasional noises about reform, most recently when he proposed a new college ratings system, an idea that the higher education lobby has correctly interpreted as a threat to its lucrative incompetence.
But he hasn’t gone far enough. It is egregious that students, parents, and taxpayers are the ones who suffer when colleges don’t do their jobs while the colleges in question are left untouched. We simply can’t let them get away with it anymore.