Rising Student Debt – Declining Personal Responsibility

by Sydney Williams According to Ronald Ehrenberg, economist and professor […]

Teenage (16-17) female college student studying in library

by Sydney Williams

According to Ronald Ehrenberg, economist and professor of labor and industrial relations at Cornell, tuition at selective private colleges and universities has grown at two to three percentage points over the rate of inflation for over a century. However, “it wasn’t until the 1980s,” he wrote, “that tuition growth began to regularly outstrip  growth in median family income.”

In the past two decades, growth in tuition at public universities has exceeded that at private institutions. Writing in the September/October issue of “The Washington Monthly,” Benjamin Ginsberg noted that between 1975 and 2005 total spending by colleges and universities between those years rose by more than three times the rate of inflation.

In last Friday’s Investor’s Business Daily , Michael Barone penned a slightly more optimistic view. He cited a Wall Street Journal report indicating that average tuition discounts offered incoming freshmen have reached an all-time high of 45% and that “sticker price” tuitions have increased at the smallest amount in a dozen years. Given unemployment among the millennial generation, potential students may be deciding that a college diploma is not worth a six-figure loan. For years, Mr. Barone noted, college and university administrators have been immune from the discipline of market forces. Those carefree times may be coming to an end if, as Mr. Barone suggested, “market forces have kicked in.”

Let us hope so, but two pieces of proposed legislation could serve to prolong this nightmare. Last week, the White House issued a proposal that would forgive billions of dollars in student debt over the next decade. Debt repayments would be based on income, with monthly payments equal to 10% of income, after taxes and living expenses. After 20 years of on-time payments – 10 years for those working in public or non-profit jobs – the balance of the loan would be forgiven. Also last week, Massachusetts junior Senator Elizabeth Warren proposed to reduce the rate students pay on federally-subsidized student loans for one year, from 3.4% to 0.75%. (They are scheduled to rise to 6.8% in July.) While it is easy to feel sorry for graduates with enormous debt obligations, they knowingly incurred the debt. Alleviating the debt may be the right decision, but it does undermine the concept of personal responsibility. Keep in mind, taxpayers would have to pick up the losses, both in terms of below market interest rates and debt forgiveness, and those taxpayers include millions of American workers engaged in trades that don’t require a college education.

This is not to suggest that the problem of over-indebted college graduates is not serious. It is. Student loan debt tops $1 trillion. It expanded from $250 billion in 2005 and now exceeds both credit card and auto loan debt. Anne Lowrey in Friday’s New York Times reported of the drag on the economy caused by the “millstone of student loan debt.” She quoted the Pew Research Center, which noted that the debt-to-income levels for households under the age of 35 have risen to 1.5-to-1 in 2010 from 1-to-1 in 2001. The effect has been to constrain young adults and to hold back the recovery. Unemployment among millennials is 50% higher than it is for the nation as a whole. Today’s students are graduating with more debt and the worst job prospects than at any time in recent history.

But it begs the more important question – the third rail of politics – how do we get Washington to stop promising programs we cannot afford? The spread between government expenses and revenues has been narrowing, but is still high and total debt continues to mount. It now exceeds GDP. And those numbers do not include the unfunded liabilities of programs like Medicare, Medicaid and Social Security. And those numbers say nothing about the costs of an inevitable rise in interest rates. Congress is required by law to fund the policies of government, but they have abrogated their role as fiscally responsible stewards.

Additionally, Washington’s proposals will serve to propagate a system of growing dependency. Being personally responsible for one’s actions is integral to a free-functioning democracy. If anything, that need has never been more critical or timely than it is now; yet the opposite is the message from Washington. Government’s tentacles reach ever further into our lives, increasing dependency. The forgiveness of student debt will only aggravate the situation, making another promise with no regard to the costs.

We need to find ways to decrease spending and implement true tax reform. Spending more only enlarges the hole that threatens to entomb us. It is self reliance and individual
responsibility that is wanted, not more dependency. For example, retirement is increasingly the responsibility of the individual. Among private companies, 401(k) plans have largely replaced defined benefit plans. Yet very few of those approaching retirement age are adequately prepared. Government should be promoting investment and savings, not penalizing them, as is done today. It is only a matter of time before public employees will face the same reality. Government retirement promises, without realistic actuarial tables, will fail. Politicians love to give things, whether it is forgiveness of student and mortgage debt, or promises of retirement for public employees and of healthcare for all. Politicians shy from addressing the costs, not only in dollars, but in the sense that dependency emasculates self reliance.

To best address this conundrum we face, we must first understand why tuitions have risen to the level they have, and we must determine whether the realization of an education has lived up to its promise. Responsibility for the outlandish growth in college tuitions has many fathers. There are several explanations. To attract students, colleges have spent millions on plant and equipment – fancy dorms, elaborate student Centers and sports facilities with every amenity – in what Professor Ehrenberg calls “an arms race.” Second, a shared system of governance between trustees, administrators and faculty has guaranteed a slow response to higher costs. Third, rising administrative costs have placed an extraordinary burden on college budgets. Forty years ago, Mr. Ginsberg writes, 268,952 administrators supported 446,830 American college professors. In 2005 three times as many administrators were looking after only 50% more professors. In the last eight years, the situation has almost certainly become even more lopsided.

But, like the housing bubble of half a dozen years ago, a good part of the blame lies with government. They have insisted that higher education is a right; they have made available the easy access to loans and government supported grants, all of which have served to allow colleges to keep raising tuitions. In his recent column, Michael Barone wrote that government’s actions produced a growing demand, “higher education administrators saw no need to compete on price. Higher tuitions just gave your school more prestige.” New rules providing below-market interest rates and accelerating the forgiveness of those loans may alleviate the pain of borrowers, but will do little to cure the problem.

As to whether a college education has lived up to its promise, any answer is nuanced. Certainly, studies of the past suggest the cost of college is more than made up for, over a lifetime, in higher wages. But things change fast. Costs are higher than ever and jobs scantier. Any individual taking on loans assumes the responsibility of repaying that
debt. Taking on debt with the expectation that taxpayers will bail one out, in terms of a painless repayment schedule and below-market interest charges, and with the knowledge that ten or twenty years down the road whatever debt still exists will be forgiven, provides perverse incentives. Nevertheless, education is important. We live in a connected and increasingly globally competitive world. To do well, our schools must do better at training students for the world that will be, not that is or was. Politically correct faculties and administrations more interested in indoctrinating students, deprive them of the skills necessary to do well in myriad vocations. College students, while professing nonconformity, too often conform in nonconform
ity. Students need to be taught to think independently. They need the rudiments and skills of a basic education, as well as the rhetorical skills necessary to challenge generally accepted preconceptions.

A big part of learning involves understanding the precepts and importance of individual responsibility. Depriving students of such lessons will have long term, negative ramifications, and risks creating a nation of what H.G. Wells called the Eloi. This memorandum has been prepared as a matter of general information. The accuracy of the material submitted, though obtained from sources believed reliable, is not guaranteed by us and may not be complete. The opinions and estimates expressed in this memorandum accurately reflect the personal view(s) of the analyst(s) covering the subject securities on the original date the memorandum was issued, but are subject to change without notice. Analyst compensation at our firm is not directly related to any specific recommendation or views contained in this research. The analyst, officers and employees of this firm may at times have a position in the securities mentioned herein.

Monness, Crespi, Hardt & Co., Inc. is an Institutional Broker Dealer. All investment advice is tailored to institutional investors. If you are not an institutional investor and have received an email containing investment information, please do not act on it and contact compliance at 212-838-7575.

“The Thought of the day” by Sydney Williams


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

Do you like the article?

We are glad you do! Please consider donating if you want to read more articles like this one.


Share this article!
Join our community and stay updated!