Tuesday, April 16, 2019

Debt Phobia

The Boy is well-situated for a traditional college experience.  He has educated parents, including one who works in higher ed. He’s smart, with good grades and a track record of academic success.  He works hard. He has a goal. He attends a good high school, where he’s enrolled in the IB program. He’s surrounded by kids who are going to ambitious and selective places, often out of state.  (That last clause is a New Jersey-ism. NJ pours money into K-12, then cheaps out on higher ed, which leads to mass exports of talented teens. But that’s another post.) He’s very much the sort of kid that traditional college is designed around.  Sociologically, he’s running with a tailwind.

And yet, even he has picked up on a widespread phobia of student loans.  

Like many phobias, it isn’t so much unfounded or random as exaggerated or misplaced.  A fear of heights is based on something; hitting the ground from a high elevation isn’t likely to end well.  But when a fear that has some basis expands beyond where it makes sense, it can become debilitating. I’m seeing some of that with student loans.

Quick quiz: statistically, which of the following students is likeliest to be in financial trouble?

  1. Borrowed $30k, got a bachelor’s, going on to med school
  2. Borrowed $10k, got an associate’s, working as a restaurant manager
  3. Borrowed $5k, dropped out in second semester, working at minimum wage
  4. Didn’t borrow, taking two classes at a time, on the five-year plan for an associate’s.

The correct answer is c, although I’d also accept d.  A and b are likely to be just fine.

The “student loan crisis” mostly isn’t a student loan crisis.  It’s mostly a dropout crisis. If you want to avoid having student loan debt hanging over you for years, the single most crucial thing you can do is...graduate.

We know that the longer it takes to finish a degree, the likelier that is that life will get in the way.  But that’s only part of it. The opportunity cost of the extra time is likely worth significantly more than the balance of typical student loans.  In the example above, student D is missing out on several years’ worth of manager-level money that student B is making. That money should be more than enough to keep up with modest loan payments.  

That’s not to deny that there are cases in which student loans are a problem, any more than denying that jumping from tall buildings is unlikely to end well.  I wouldn’t advise anyone to take out six figures of student debt either for an undergraduate degree or for a non-elite graduate degree in a traditional academic field.  But a few thousand to speed up completion of an associate’s in hospitality management, automotive technology, or a transfer-focused degree that sets you up for something better?  Absolutely.

Certainly, there are some policy changes that would make the student loan system better.  When the next recession rolls around, as they are wont to do, I’ll make my Keynesian pitch for forgiving the interest on the loans.  Recessions are not the fault of students, nor are they the fault of colleges. They’re just part of the business cycle. Borrowers would still be on the hook for the principal, but forgiving interest strikes me as a reasonable middle ground when recessions strike.  Certainly, student loans should be forgivable in bankruptcy or upon the death of the borrower. That’s just common decency. I’m a fan of much greater operating funding for public colleges and universities so they don’t have to keep raising tuition. Besides, in the long run, it’s a lot cheaper than bailing out for-profits that sprung up to fill the gaps that underfunded community colleges were unable to fill.  There’s plenty of policy work to do on student loans. And there’s even more policy work to do on the economy more broadly.

But in the meantime, student loan phobia cuts off the avenues to higher income that make student loans payable in the first place.  The Boy has parents who know that, but not everybody does. Fear of heights may have a rational basis, but if you never look down, you’re much likelier to fall.