Even though other consumer debt-bombs have done more damage, student debt is producing significant social and economic distortions. One is so useful to the authority structure that it seems certain that they will keep this type of bondage in place. Heavy debt loads pressure young people into making conservative choices. If you carry a lot in the way of student loans, you have to worry about employability. That doesn’t simply push graduates into bigger ticket (hence more conventional) career choices; more important, it makes them far less likely to step out of line. In particular, an arrest record, which is often a by product of protesting, is an automatic out with a lot of employers.
But the level of student debt, now estimated at over $1 trillion outstanding, is having an impact on spending. First time home buying is running below the level expected given new household formation, and a big culprit is student debt loads, since many young people are too leveraged to take on a decent-sized mortgage on top of their existing obligations. In addition, the 25 to 39 year old cohort is the top target of advertisers, but the more debt service they have, the less they can buy in the way of goodies.
Adam Levitin has taken his first serious look at student debt. Aside from grumbling at the dearth of academic research, he offers some useful observations. The big one is that the problem is the level of debt: student debt rates are generally pretty favorable, and the loans also offer a lot in the way of payment flexibility.
He also made a modest suggestion:
Why we are financing education via debt? It’s not obvious that we have to do so, and that’s the easiest way to avoid leverage going forward. Milton Friedman proposed equity financing some years back, meaning that the school got a % of future income, rather than a fixed amount. It could be as progressive or regressive as a school wanted.
Yale tried such an experiment in the 1970s, but with poor results–the alumni didn’t pay. Yale didn’t want to sue its alums, and let them convert to debt at a favorable rate. But that’s an easily surrmountable problem–we could have education payments rolled into tax bills and collected by the IRS, which would then remit to the schools. Non-payment isn’t stiffing the school. It’s stiffing Uncle Sam, who is much better at collecting. It’s not such a radical idea–Australia collects student loans via its tax service.
There’s an entrenched education bureaucracy that would have a lot of trouble changing to an equity financed system (alumni fundraising would surely suffer, for example). But it would mean that people take the jobs they want, rather than the jobs that pay the student loans. That might be a very good thing for society, even if it would certainly hurt some employers (think those who pay recent graduates outsized “hazard pay”).
The biggest problem with equity financing is that it has no maturity. So will graduates keep paying their entire lives, or until retirement? That seems awfully long, but limiting the time frame (say to 20 years) guarantees income deferral by those able to do so.
But a lot of the other incentives seem positive. Schools administrators would not wind up misrepresenting the attractiveness of investing in education as they do now by telling students of average increases in earnings power, which is probably a misleading metric if you choose to major in musicology or civil engineering. And graduates would not have to worry about the consequences of taking an entrepreneurial or social-service oriented job.
And putting schools at risk for future payments might lead them to focus on delivering more cost-effective education rather than edifice and overhead building. Cheaper education would clearly be a better solution, but it’s hard to stuff that genie back in the bottle.
What is your reaction? And if you don’t like equity as a remedy, what fix do you propose?