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.