Pretty Much Everything You Need to Know about the Student Debt Crisis

Some stats courtesy of The New York Times:

The size and rate of growth:

• More than $1 trillion dollars in student loans outstanding. 
• The federal balance for student loans has grown by 60 percent in the last five years. 

Most are not being repaid:

• Payments are being made on only 38 percent of those loans. 
• Nearly one in 10 borrowers who started repayment in 2009 defaulted within two years, the latest data available — about double the rate in 2005. 

Most of the cost increases come from cuts in support at the state level:

• From 2001 to 2011, state and local financing per student declined by 24 percent nationally. 
• Over the same period, tuition and fees at state schools increased 72 percent, compared with 29 percent for nonprofit private institutions, according to the College Board. 

I know the math seems weird, but the decline in support and the increase in tuition are roughly equivalent. 100/(100-24) - 1 = .31; this is the amount that tuition needs to grow on its own to account for the decline in funding (as a rule it takes a larger percentage increase to compensate for a percentage decline). Plus the 29 percent growth at private schools, the normal rate of cost increase in the industry - and similar to the rate of inflation (about 3 percent), tuition should have increased 60 percent. That means only 12 percent of the growth in cost over the last decade is not explained by those two factors; only 1.2 percent a year.

Ohio is emblematic of this change:

• Ohio’s flagship university, Ohio State, now receives 7 percent of its budget from the state, down from 15 percent a decade ago and 25 percent in 1990. The price of tuition and fees since 2002 increased about 60 percent in today’s dollars. 
• In the late 1970s, higher education in Ohio accounted for 17 percent of the state’s expenditures. Now it is 11 percent. 

Similar to the subprime mortgage problem, the problem started with a scummy business model and spread from there:

• Students at for-profit colleges are twice as likely as other students to default on their student loans. Moreover, among students seeking a bachelor’s degree, only 22 percent succeed within six years, compared with 65 percent at nonprofit private schools and 55 percent at public institutions. 

Obviously, all of this leads to calls for reforms. The need is obviously there, because the demand for college education isn't going anywhere. People with bachelor degrees make, on average, make twice as much money as workers without. There are a host of other general life benefits that a college education brings too. Including family stability, health and high levels of opportunity for their children.

But if we're going to make changes, what should we do? The answers aren't perfectly obviously, and I normally have very little sympathy for most people with student debt. Most people that incur debt in college manage to pay it off. The average is only 23 grand, the median is half of that (12,800). This means that over half of students who graduate college with debt only have to pay 13,000 dollars back. Considering that almost all (94 percent) of college graduates have some debt, this is a pretty representative description of the "cost" that recent grads face.

For all of the benefits that come from a college education, that's a reasonable debt burden. I don't see any reason to agitate against that.

Once you start to see the problem in that light, the actual issue becomes much more clear. Student debt follows the distribution of a power function. Most people aren't in that bad of shape. But 10 percent of college grads have more than 50 grand in debt and 3 percent have more than 100 grand. This is where something needs to be done.

The challenge with this, though, comes from dealing with the source of student debt and the financing of college. A student union would have to convince everyone else to help pay for the college educations of a incredibly small proportion of total college grads (those students truly drowning in debt). They would directly benefit, while the rest of society probably wouldn't see any obvious increase in their well-being.

At the same time, 90 percent of this debt is held by the federal government. Stopping payments to agitate against "the banks" wouldn't do any good. It's also why discharging student debt is so goddamn hard. You owe the feds, who can be infinitely patient and especially coercive in making sure you pay.

This means that there is some room for flexibility too. Obama keeps talk about debt relief for people with underwater mortgages, maybe something could be done for college grads with underwater college debt (i.e. no hope of ever repaying it). Under normal conditions, they should have qualified for a pell grant or some other form of direct funding. So why don't you just give it to them retroactively?

More important, though, is making sure that the remaining 90 percent still has the means to repay their debt. This is becoming harder because of the state of the economy, and it is not a problem with student debt in and of itself. A normally functioning economy doesn't have baristas with master's degrees. The job market for recent college grads is especially bad right now, even though their long-term prospects remain relatively good. This is just further justification for some efforts beyond monetary policy to help improve the labor market.

Liquidate the Debt!

Continuing on the discussion of the Gold Standard, we have Ron Paul's statements on debt, the lynchpin to the Gold Standard's failure.



I'm not always sure what Ron Paul means by that, and I'd appreciate better clarification. I often worry that it means defaulting on US debt, since this is what Paul seemed to want during the debt ceiling debate. I believe that would cause a lot more harm than good. Since interest rates continue to be low, even though (or maybe because, causality on this isn't always clear) the US is one of the last developed economies that hasn't dropped back into a recession, the US could borrow and spend its way out of the depression.

That doesn't mean borrow and spend forever. But it does mean doing something other like stopping the 15,000 + government layoffs happening every single month.

The chart is indexed, instead of based on a specific value. Pay attention to the trend. Via Matt Yglesias.

If the Federal government would have stepped in and financed state governments further, we'd have saved the jobs of 1.3 million federal workers. That's more than a percentage point in the unemployment rate.

There's a limit to this, of course. You could say that this would last until the private economy adds an average of 300,000 jobs for 6 months straight. By then, recovery should be well set in.

Like the WWII debt, which was never technically paid off, over a long enough horizon, that debt wouldn't matter too much in the long run. If you finance it at 30 years with the tiny interest rates on long-term US bonds, enough growth and moderate inflation would make it go away. As I've written before, it's debt to gdp ratio that matters most, not the nominal value.

I do believe that private debt overhand continues to be a problem and it is a big problem in many other countries. The Obama administration has tried and failed twice to bring some form of mortgage relief to borrowers. I'd be interested in seeing how Paul would manage to do that, since private debt is obviously a huge depressor on private spending right now.

Crucified on a Cross of Gold

A good argument on implementing the gold standard from Jim Grant, which he gave during a visit to the New York fed. He points at the inflationary price stability is artificial, arbitrary and too dependent on central bank enforcement. It's the same kind of superficial stability that Taleb always rails against.

He very convincingly points out that in the absence of debt, there is no reason not to expect prices and wages to adjust both up and down as necessary. This would eliminate the deflation threat that the Fed is so clearly terrified of.

More importantly, he argues that stabilization efforts have a nasty side effect: the explosion of debt, which on its own becomes a much bigger threat to greater economic development. Its also evident that debt is one of the most effective tools to transfer wealth from the poor to the rich, creating a malignant cycle. More inequality feeds more debt feeds more inequality.

Of course, there's two problems. First, as Europe points out so well, wages are very sticky. It's damn near impossible to get them to adjust down, no matter how much pressure you put on them. Grant's argument depends on labor contracts that don't fix wages for years into the future. I just can't imagine any situation where people would find this acceptable.

Even worse, Grant's whole argument is only possible in the absence of debt, something that's appeared in almost all societies since the dawn of civilization itself. It's great to think of an infinitely flexible economy, but that's just not how the real world works. We need to borrow money from time to time, and paying it back locks us into a specific payment regime for years into the future. If deflation strikes, debtholders are in a lot of trouble.

This example is part of the incredible naivete and wishful thinking of the goldbugs. Yes, under the weird world where long-term contracts don't exist, a gold standard would be nice. Unfortunately, the world is messy, and a gold standard would just make it messier.

On that note, since we do live in a debt-ridden world, it wouldn't hurt to go through debt forgiveness a little more often.* Of course, this would depend on a more balance of power between creditors and debtors. And since creditors are usually wealthy and debtors are usually poor, that's definitely not going to happen any time soon. But a boy can dream.

*For the actual poor, not the well-off and well-employed who "suffer" monthly payments to Sallie Mae.