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.