Tuesday, March 01, 2016

Getting the Question Right

Quick quiz: among which group is the student loan default rate the highest?

  1. college dropouts
  2. associate degree graduates
  3. bachelor’s degree graduates
  4. they’re the same

The answer is a.  Even though they have the lowest balances -- having spent the fewest semesters in college -- dropouts have the highest default rates.  

That’s worth emphasizing.  The people with the lowest outstanding balances have the highest default rates.  It’s counterintuitive, but fundamental.  

The issue of defaults is separate from the issue of “loan burdens.”  Above zero, they’re almost inversely related.  When we hear talk of “saddling” students with debt, we need to be very careful to note exactly what we’re talking about.

The key issues here are completion and starting salaries.  Students who complete degrees have higher debt burdens, yes, but they’re much more capable of paying them off, because they make so much more.  

It’s possible to find the occasional loquacious SLAC grad with six figures of debt working at a Starbucks, but those aren’t representative.  They’re outliers.  The real story of student loan struggles is the student who dropped out of community college after a semester owing $1,500.  

Yesterday’s post was a response to a proposal by Neal McCluskey, in the Wall Street Journal, to move student lending to banks and allow them to judge the academic fitness of prospective students.  I took offense at the prospect of replacing universal access to higher education with screening done by the same people who caused the mortgage crisis.  McCluskey responded, in part:

Reed next argues that many debts are hard to repay because “entry-level jobs don’t pay very well,” and he laments that “McCluskey never addresses either the supply of entry-level jobs, or the minimum wage.”  Again, you only get so many words in an op-ed, so you simply can’t tackle everything. But Reed’s argument shines a negative light not on me, but what he apparently thinks college prepares many people for: entry-level jobs often paying, he implies, minimum wage. If that’s the case, what is the point, at least economically, of getting a degree? And if it is the case that you now need a degree to get a minimum-wage, entry-level job, does that not at least suggest – even to a non-heartless person – that we are suffering from massive credential inflation spurred by too many people going to college? And is allowing someone to take on substantial debt not a very dangerous proposition if their likely destination is minimum-wage employment?

No, that’s not it at all.  He’s conflating graduates with defaulters.  The default problem is a dropout problem, not a graduate problem.  The minimum wage is relevant for dropouts, not graduates.  Graduates do quite well on paying back loans.  That’s a key difference between community colleges (as a sector) and for-profit colleges (as a sector).  

If the great fear is saddling people with debts they can’t pay -- an outcome I don’t desire any more than McCluskey does -- then a one-two punch of free (or much less expensive) community college and a higher minimum wage should do the trick quite nicely.  And that combination would retain universal access, which is both an ethical and a political imperative.  

In the meantime, let’s go about solving the right problems.  That begins with noting where the problems are.