Why the Student Loan 'Crisis' Isn’t Actually a Crisis
As summer gives way to autumn, millions of young Americans participate in an annual rite: back-to-school. This includes the more than two million freshmen who are entering university for the first time—many with help from student loans.
When people borrow money to purchase new cars, does anyone call it a “car crisis”? No. Purchases of new cars, most of which are made via a personal or auto loan, are treated as a sign of economic strength and consumer optimism.
Yet purchases of education via loans are being called a “crisis.” This is strange. After all, education is an investment that generates higher future earnings, whereas cars rapidly depreciate in value.
Sure, $1.6 trillion, the estimate for student debt, is a lot of money. But Americans owe more than $1.2 trillion for car loans. If it is the sheer amount of money that warrants the title “crisis,” then the housing loan debt, which exceeds $10 trillion, should be called a “catastrophe.”
Do some students take on too much debt and overestimate their ability to repay? Of course. But on average, those with college diplomas make nearly double those with high school diplomas. During their working life, people with degrees earn on average about $1 million more than those without. Even when taking into account the cost of US college, earnings foregone while in college, and discounting future earnings at 2 percent, the benefit is $500,000 for men and $300,0000 for women.
Is tertiary education in the US so exclusive that most cannot attend college? Hardly. Data from the Organization for Economic Cooperation and Development (OECD) show that nearly half of Americans in the 25-34 age range have tertiary education. This is slightly more than Sweden and significantly more than France (40 percent) or Germany (33 percent). In fact, per capita, America has more tertiary education than any country in Europe, except for Luxembourg, Ireland, the UK, and Lithuania.
Perhaps the quality of education is subpar? Wrong again. US universities are the best in the world, according to most global rankings, and the preferred destination for the world’s most talented students, evidenced by the $35 billion export surplus in education services. Unlike with American cars, global consumers really do think American universities are the best.
There are individual crises, of course. The art student who owes $90,000 for his two-year degree. The borrower who owes $500,000 for degrees in acupuncture and naturopathic medicine. For any individual taking out hundreds of thousands in debt and settling into low wage work after graduation, the situation is a personal crisis.
Such individual scenarios are bound to happen. Some businesses fail, and some investments in education don’t pay off. Some individuals miscalculate when choosing a degree. Some will graduate with few skills and not increase their earnings. Some students will quit.
Some politicians are suggesting that we should forgive all or a significant portion of Americans’ student loans. But ask yourself: if taxpayers are forced to pay for college or college debts of others, will that increase or reduce the percentage of baristas with bachelor's degrees?
Blanket policy solutions like “cancel student debt” aren’t just costly, they’re also poorly targeted because people who accumulate student debt tend to have more education and, hence, more earning power. For most students, borrowing for college still produces a positive economic return over their lifetimes.
While student loan default rates are higher than average, the fact remains that nearly 90 percent of student loans are not delinquent. As a policy, student loan cancellation aligns poorly with calls for social justice or reducing income inequality.
The much-hyped calls for student debt cancellation exploit the legitimately sad stories of some individuals, to push through policies that are costly, wide-reaching, and would encourage even more bad decisions by individuals—more baristas with expensive degrees.
The person with $90,000 two-year art degree and no job is experiencing an unfortunate personal crisis. We should avoid making it a national one.