On Student Debt and Youth Unemployment
Derek Thompson of The Atlantic has written extensively about the current recession. As he notes, young people are having an especially rough time making ground in the workforce right now. Students are graduating “$23,000 in the red,” on the whole, “joblessness is between two and three times higher for 20-somethings than it is for older workers,” and “the unemployment rate for males between 25 and 34 years old with high-school diplomas is 14.4%, the Wall Street Journal reported.”
That last sentence shows just how important a college degree is for obtaining employment right now. For most, college, to the extent that it is a “consumption good,” is an entirely necessary one. As Tod Kelly explains, a liberal arts education, if done right, is a practical way to broaden one’s general skill set, network through faculty connections and internships, and remain flexible in the face of market shifts. It signals to potential employers the following:
“It means that the candidate has a workable baseline of intellectual discipline. It means that they have the ability to effectively communicate, in writing as well as verbally. It means that they have demonstrated the life skills to juggle a personal life with non-fun goals and deadlines. More importantly, it means that they have demonstrated that they are cable of learning.”
But a college education is extremely expensive. Like other necessary products, medical care for instance, the price of education has continued to rise. The result is that young people start out of the gate already saddled with a heavy burden. In theory, the burden of student debt should work to focus the mind and lead young workers to compete in the economy where they’ll have the highest chance of repaying it. But there are other unintended consequences as well.
Few people’s lives unfold smoothly, and even the best laid plans often never come to pass. But what medical and student debt burdens do is to emphasize the month-to-month and micromanage the development of short-term plans. I would venture that this is especially the case with recent college graduates. Loan payments month to month can mean taking a lower paying job sooner rather than building skills at a non-paying internship or spending a few weeks longer finding that position that is more lucrative or contains more upwards mobility within the organization. Sure, no one should be holding out for that dream job that probably won’t ever materialize. But by the same token, work history and previous salaries are important, and jumping on the merry-go-round at the wrong time or in the wrong place can have long-lasting consequences for future career possibilities.
In this respect, student loans are a lot like medical insurance, both instruments obscure the true cost of the services involved, and both tend to restrict mobility in the labor market. The best long term way to cut down on student debt is to bring higher education costs under control. Like with health insurance, I think one of the better ways to do that, at least relative to the status quo, is to offer a much more robust public option. State universities have done an awful job of curtailing tuition hikes and community colleges, while cheaper by comparison, also offer an inferior product in most instances.
Some version of a higher-ed public option would probably look like most European public universities. High standards and lost cost of attendance for those who are admitted. There are obviously other ways to try and bring higher education costs under control, but I’m not sure how tweaking the existing system would make college both more affordable as well as offer a cheap, merit-based alternative.
But however higher education costs are brought down, it won’t do anything to affect the debt already accumulated by current college graduates. For that, making student debt dischargeable in bankruptcy and some sort of refinancing program would probably be best. Student debt is widespread and not just isolated to a certain part of the middle to upper class.
Tackling the largest portion of consumer debt by addressing student loans should be a no-brainer. After all, it would help a number of households to deleverage more quickly and as a result put more money in the hands of those who would spend it as well as open up a range of entrepreneurial possibilities for creative and innovative young people. And those people, given the current economic context, will most likely come out of college to debt ridden to take many chances in the new go-it-alone job market. The Bill Gates and Steve Jobs of today and tomorrow won’t be college drops outs. For the better or worse the system today is rigged against such outcomes. That may change, indeed I hope it does. But even while working toward a fundamentally different labor market for the future, the fact remains today that the consequences of young people’s economic struggles will be trickling up the economic ladder for years to come.
A lost decade for the United States (and the world) starts with ignoring the new lost generation.
The Bill Gates and Steve Jobs of today and tomorrow won’t be college drops outs. For the better or worse the system today is rigged against such outcomes.
The system was, is, and always will be rigged against college drop-outs becoming titans of industry.Report
Maybe I am over-optimistic, but I think it is becoming more likely that the Bill Gates and Steve Jobs of tomorrow will be college dropouts. (NOTE: I don’t think that college dropouts will be more likely to become the next Bill Gates or Steve Jobs — college is still the way to go!). First, there is a sampling bias: people who graduate high school and move on to an undergrad education are following the ‘proscribed’ path.’ I think innovators are more likely to think that that path is not for them. Second, in the information age, startup requirements have been dramatically reduced. Third, it is becoming easier and easier to educate yourself (again – this is not the proscribed route, but for the truly innovative – alternate forms of education are much more accessible than any time in history).Report
Third, it is becoming easier and easier to educate yourself
While I’m a big believer that there are severe drawbacks to self-driven education (it is difficult to know that you’re incorrect when the ability to perceive the error is outside the bounds of your knowledge to begin with), I will say this…
When I was in college, a F77 compiler was a hugely expensive piece of software. As was a C compiler. A machine capable of compiling industry-strength code was several thousand dollars, as well.
Nowadays you can write software for embedded control systems using tools that you can download for free, and even your phone has more than enough processing power to do the work. You can take college-level introduction to computer science courses for free.
The self-driven hobbyist is indistinguishable from the lackadaisical professional, really.Report
Ah come on Pat, what lackadaisical professional could put out this?Report
Nerds with OCD are undoubted outliers in all cases.
Shoot, otherwise Linux makes no sense. It shouldn’t exist.Report
Sure /you/ call it obsessive compulsive disorder, but /I/ call it occupationally challenging dilettante-ism. And we won’t even get into Aspergers Syndrome, too close to home. 😉Report
Without getting into whether student debt should be dischargeable in bankruptcy as a general matter of policy – and there are certainly reasonable arguments that it should be – it seems worth mentioning that a side effect of making such debts dischargeable will most likely be to increase the effective cost of higher education further, quite possibly significantly so, by making such loans riskier.Report
It’s certainly true that the cost of personally financing higher education will increase. As it should.
With any luck, that will force us to deal more head on with the actual costs of running the day-to-day operation. I’d exchange a point or two in higher interest rates for dramatically lower tuition.Report
Since the change to make student loans non dischargable was made because folks figured out that going BK was a fairly painless way to pay off student loans (I recall hearing about the scheme in grad school in the 1970s). Since then they became non-dischargable because if they were dischargable, and you have rented an apartment, with only an old car, and a job, BK means only not being able to borrow for a while. As a result student loans would become essentially unavailable.
(I recall hearing about the scheme in grad school in the 1970s).
Friends of my brother had this scam perfected, even tho they were generally from very wealthy families (he went to SMU).Report
I think the libertarian analysis of non-dischargable student loans is one of the situations where they got things right and liberals ought to concede almost the entirety of their argument. Even if we assumed once upon a time that education ought to be more accessible, the mechanisms implemented failed miserably. And then there’s cleaning up the mess.Report
It seems to me that putting a cap on non-dischargeable loans amounts would actually likely have the effect of aligning the interests of lending entities with students – namely to direct the force of financial institution’s and taxpayers’ direct financial interest to the problems of high tuition and non-marketability of degrees. This might take the form of overall fewer education loans being made over the short term as lenders reacted to the new regime with caution, but isn’t that something that has been identified as a perhaps necessary if difficult adjustment that needs to be made at some point – that the levels of lending that we have for degrees of dubious investment value in imparting earning power is not sustainable and amounts to a bubble? Why not approach that from the supply side rather than trying to convince young people they need to focus on the hard, boring stuff by simple prudential arguments?Report
A cap on non-dischargeable amounts would certainly have a much different analysis than outright making such debts dischargeable (on the overall merits of which, I again emphasize, I here offer no opinion).Report
As would a cap on discharged amounts, if you’re looking at it the other way.Report
I’m not so sure about that, actually. A cap on what could be discharged would, from the lender’s perspective, just be a difference in degree from permitting discharge outright. But a cap on what was non-dischargeable would at least marginally incentivize the lender to push for lower-cost education – the lender wants all of their debt to be non-dischargeable, so they would be quite happy to lend slightly less in order to get the extra security for their loans. This is especially true if the limitation on the non-dischargeable amount is based on the original principal amount rather than on the cumulative total of the debt including accrued interest. (IOW, the cap on non-dischargeable debt would be defined as “original principal up to $X, plus any interest attributable thereto.”). The lender’s incentive becomes to provide as many loans as possible within that limitation, so it wants to push colleges to stay within that limitation.
If you do the opposite, and allow dischargeability up to a certain amount, then the lender has the opposite incentive – to provide relatively fewer loans in relatively higher amounts.Report
I imagine that employers will be very interested in whether a prospective employee went bankrupt or not.
Should bankruptcy be interpreted as a signalling device?Report
Oh, I meant the dynamics would change, not necessarily that they would change in the same way.
Sorry, I was being unclear.Report
Michael- I’m consciously trying to avoid weighing in strongly on this issue, but I must admit that there’s quite a bit of merit to limiting what is non-dischargeable the more I think about it.Report
I’m confused – is the takeaway here really that we should make college loans part of bankruptcy proceedings?Report
Let me rephrase: It seems like that is your primary prescription for solving college-payment woes.Report
That, and you subsidizing a public option.Report
The takeway is that debt is bad, college degrees are by most account necessary if one’s to have any real shot at upward mobility, and yet the costs of obtaining one are astoundingly high.
At the very least, bankruptcy forces lenders to take responsibilty for their lending, thereby cutting off the debt at its source. Most people take out loans for college. If they can no longer afford it, they won’t go. And if going to college really is important for economic growth and propserity (I suspect that in certain way it is), we’ll find a way to fund it other than 10-20 years of debt per individual.
I would suggest that driving down the amount of loan money a student can receive would be a good idea, as it would force universities to adjust tuition rates accordingly.Report
I think Michael Drew’s point about limiting what is non-dischargeable would largely achieve this same result, though in a more indirect fashion.Report
I agree, however I think it sends a faster and more direct message. Plus it’s not dependent on personal failure.Report
No doubt, but the effects of a direct hard cap are pretty radical, and I expect that the OWS folks would not terribly like those effects (even if they might say otherwise). It would surely pop the higher ed bubble, rather than just deflate it. Deflation of that bubble is a necessary thing over the long run, but abruptly popping another bubble in this economy is not something many of us would enjoy experiencing.Report
Deflation of that bubble is a necessary thing over the long run, but abruptly popping another bubble in this economy is not something many of us would enjoy experiencing.
I’m not so sure, myself. I used to think so. Now I’m wondering if just getting it over with doesn’t come with a bunch of other advantages.Report
Does it pop or does it just reset the playing field, making affordable colleges the top dogs? As a former community college attendee I must admit I would love them see the credit they deserve for making higher education affordable.Report
Here’s an interesting data point from Megan McArdle, suggesting that the ridiculous cost of an Ivy League eduction may actually reflect its signaling value:
I usually cut out the small chat at cocktail parties by claiming I’m only a high school grad, or that I only got a GED. It’s more fun that way, especially if there are people there who actually know me. My hiring experience with folks from the Ivy’s wasn’t so great. I didn’t accept my full-ride scholarship to Yale because at the time their computer science program was even more abysmal than the smallish state school I eventually went to. I shouldn’t be the only one who found it disconcerting at the time that Metcalfe’s Phd was originally turned down by Harvard because it was too “practical”.
I’d hire this guy in a heartbeat if I needed a salesman. Could care less if he even has a degree.Report
“High standards and lost cost of attendance for those who are admitted.”
I can think of no better way of redistributing wealth upward than to make college cheap, but selective.
(which doesn’t mean I’m entirely against it, but I’m quirky that way)Report
That would certainly be an initial affect, especially if introduced into the current context where public education k-12 is highly inquitable.
What if we floated the idea that the top 10% in their high school class would all be given a certain discount, and grade it from there.
By delineating by school district, you get around the problem of national percentiles.
I’m not urging this particular approach, but something like it would stop all of the slots necessarily going to those in select schools and from already well educated families. Home schooled children could make this up via a series of high school exams specific to the school district in which they preside.
It all get’s pretty complicated pretty quickly. But any large shift in higher ed policy, like rethinking how we fund it, would require complimentary shifts at the k-12 level.Report
I don’t think I’d put up a picture of a guy with a ring in his nose and then talk about the difficulty of finding employment. I’m fine with nose rings, but most employers aren’t. I guess he takes it out when he’s interviewing and not protesting.
I also think that too many people are receiving loans to go to college who have no legitimate business in college (the demand drives up prices), and who will do better learning a trade. I deal with a lot of handymen/people and most of them are making good bucks right now when people have to fix what they have rather than buy new.
There are a lot of ways to make a living until you can afford to be picky or advance into easier positions of supervision or ownership.Report
“I don’t think I’d put up a picture of a guy with a ring in his nose and then talk about the difficulty of finding employment. I’m fine with nose rings, but most employers aren’t. I guess he takes it out when he’s interviewing and not protesting.”
LOL. I was thinking the same thing…Report
Aggregate unemployment numbers have nothing to do with an individual’s behavior. To the degree that his nose ring hurts him, his lack of competetiveness will only help someone else.
And I’m all for trade schools. Which is why I think stricter academic standards would help steer people with little to no academic interests toward trade or apprenticeship programs.
Again, things like that need to also start earlier. There’s no reason someone can’t come out of high school as a competant mechanic, electrician, what have you.Report
Germany does this exactly right. Not everyone is cut out for college and the “trades” are always in demand. Their society (unlike ours) also respects a person who is skilled with their hands and a great mechanic makes as much as a mechanical engineer.Report
“Aggregate unemployment numbers have nothing to do with an individual’s behavior. To the degree that his nose ring hurts him, his lack of competetiveness will only help someone else.”
True, but attitudes play a part, and unemploment is a multi-faceted problem. I doubt he’s the only one among these protesting kids with appearance or attitude problems. If unemployment is to be solved, it will take serious systemic and cultural changes. I, too, believe a kid should leave high school with what he or she needs to go directly into employment, but cultural attitudes and systemic failures are big parts of the problem preventing this with no quick fix solutions. One reason, I believe, is that intellectuals have failed to convey the overarcing ideas which lead to good work ethics and innovative solutions to failed State education. The intellectuals of our time have become State stooges, defending a cult of collectivism, victimhood and dependency rather than inspiring ideas of individuality, creative free thought, achievement and self-reliance (this is will go over big, I’m sure).Report
M – It went over big with me. When your right, you’re really right.Report
“I am all for trade schools…”
“college degrees are by most account necessary if one’s to have any real shot at upward mobility”
Why would you be all for trade schools if they do not confer any real shot at upward mobility?Report
I’m sympathetic to the sentiment but can’t help but observe that if student loans become dischargable through bankruptcy then pretty much all private forms of student loans can be expected to become extremely expensive and scarce with government provided student loans following relatively quickly after.Report
While everyone is sanguine about “dumping” the loans I thought I’d look a bit at the outstanding total. Anyone want to hazard a guess? I guess the housing crisis wasn’t damaging enough to the economy, time to double down on something that exceeds the US credit card debt.Report
A couple of things about this from someone who’s marginally employed by one: “State universities have done an awful job of curtailing tuition hikes…”
Oh yeah. There’s a couple of trends going on at once and untangling them will be difficult when we inevitably have to fix this issue. In the first place, state funding for higher ed has been declining for years now and that has accelerated recently for understandable reasons. In response, state universities are lobbying for more autonomy from their state governments. Here, anyway, they want more autonomy specifically because they want to raise tuition rates faster than the state will allow them to.
Secondly, they’ve responded to that decline in public dollars by trying to run their universities more like businesses on what they see as a consumer market model. I am of the belief that these people are really fishing bad at understanding their market because this has generally meant throwing a ton of money at “value added” bells and whistles to attract freshmen, thus driving their overhead up and bloating their administrative structure, and all at a time when enrollment is at a record high nationwide anyway. Nobody that I know of is hurting due to low enrollment and their customers keep telling them that they want lower tuition. For the record, I actually really admire capitalism and bright, enterprising business-minded people, but have a lot of resentment for those people whose dumb business decisions run their industry into the ground. This bubble is ready to pop.
Thirdly, while the states have been draining funding, they’ve been very happy to use the state U as a make-work program whenever there’s no more room at the DMV. Someone recently commented to me that, in the rust bowl, people see public employment as the only growth industry now. And it is.
But the fact that these people can’t run their ships in a way that is economically feasible during a time of record enrollment? It’s scandalous.Report
An even better article (skip the video, just click on the “expand” button immediately above the video).
From this article:
With all the modern technological advances the world has been experiencing in recent years, the cost of a quality education in America should be getting cheaper. It is now cheaper to purchase a plasma television or laptop computer than years ago because the government doesn’t subsidize purchases of these products. If there was a true free market in college education, colleges would be figuring out more cost efficient ways to educate students using modern technology in order to bring tuition down and compete against each other for the enrollment of students. By guaranteeing student loans and providing too much financial aid to students, the U.S. government destroyed the free market in college education.Report
The free market achieves it vaunted efficiency by eliminating consumers without the means to pay- toasters are only available to those who can buy one.
Is that the result we would want for education?
Can you point to a society in which a free market college education provides widespread education to the middle class?
What would be wrong with the model we had in the postwar era, in which taxpaeyrs provided generous education at all levels to nearly anyone who wanted it?
Liberty, please watch the video and actually read the article, not just the short blurb I quoted from it. The fact is, the /true/ market price for education is completely out of whack specifically BECAUSE the government is paying the tab, bot directly and indirectly via student “loans” that are in substance even worse than the liar loans that sank the mortgage industry. To quote further from the article you didn’t read:
Over the past decade, any 18 year old has had the ability to take out large student loans without even being asked if they have a job or what their high school grades were, what they intend to major in, or any other information that would help determine their future ability to pay back the loan.
Finally I thank you for the opportunity in this response to redact my previous statement about not bothering with the video. The text is woefully incomplete, the video explores far more in far greater depth about this artificial “bubble” in education.
You can point back to the glory days of an altruistic past that may or may not have ever existed but we are faced with the current reality and how this reality shapes up going forward. Higher education is a disaster, degrees are becoming increasingly meaningless in all but a few disciplines and the inflation rate in higher ed vastly outpaces the real inflation rate. Economics says this can’t happen unless there is a thumb on the scale, obviously this is the case today.Report
“You can point back to the glory days of an altruistic past …”
Well, thats what us principled, Burkean conservatives do. We look to tradition and history for guidance.
One side effect of college debt is its ripple effect on the economy as a whole, in that it effectively transfers wealth from manufacturing to the finance sector.
For those graduates who strain each month to pay their loans, what are they not buying?
How many cars, houses, refrigerators, TVs, clothes and so on are not purchased, diverting how many billions away from the consumer economy towards the financial sector?
I would assert that it isn’t a wash- the same amount of money given to Citibank translates into fewer middle class jobs than if it were given to Ford, Westinghouse, and KB Homes.
It wasn’t always this way, and it doesn’t have to be now.Report
There are two and only two ways to make higher education cheaper. Cram down salaries and increase the student to staff ratio. (That is why for heaven’s sake a toaster is cheaper today than 30 years ago.) Modification of the student loan structure won’t do it. Direct public financing would make a difference, but no state is proposing to do so at a rate that would make a difference.
Where things appear to be moving is anon. 13th and 14th grade are becoming more standardized and high school-esque. This involves a reduction in the breadth and depth of electives. Almost all electives are now survey courses. In exchange, 15th and 16th grades are where the real learning is taking place and hence we are seeing education often drawn to a 17th year. Given the cost differential of factory content with original, even the top universities have had to move to survey classes in order to compete. And given that we are offering factory content for the first couple years, the necessity of having a doctor in the field teaching it is obviated. Given that humanities salaries are sitting around HS teacher levels, we have pretty much extracted as much value as we are going to get from there.
The real problems showing up with this approach are that top level students are having the first two years of their college experience wasted. Weak students are not being weeded out of programs they will have significant difficulties completing. The survey courses (major specific and non-elective) are not providing a rigorous enough foundation, and there is a significant disparity in rigor from one college to another (and even from professor to professor within a college) in these courses. This is leading to foundational material having to be retaught in junior and senior courses resulting in those courses losing breadth or depth.Report