High Student Loan Default Rates a Clarion Call for Reform

It’s a pretty simple, if tragic reality. College costs keep rising and the value of education keeps dropping. Something has to give right?

In almost any other sector of the economy the answer would be a resounding yes. Consumers—students in this case—would demand more for their dollars. But something strange has happened to our higher education system. Students are increasingly becoming divorced from their dollars by a Washington-run student loan system that seems to care very little whether or not it will ever see that money again.

To see why just remember back to your days as an 18-year-old high school senior. If you’re anything like me you spent a great deal of time worrying about getting into the right school and little time concerned about how you’d pay for it once you were through. Part of that is simply being a teenager with little concept of money. But regardless of age it is much more difficult to think about paying a debt that won’t be owed until four years down the road.

Unfortunately, this has led many young adults into serious financial trouble. Caught between soaring tuition costs and a historically-poor job market, many recent graduates are being forced to delay, or worse, default on their student loan debt. The Wall Street Journal’s Josh Mitchell reports:

Just about four in 10 borrowers with direct federal student loans are paying them back, according to a report released Monday that offers the first comprehensive snapshot of the program since the government created it in 2010.

. . . The report indicates that a significant number of borrowers in the new program are unable to repay. Excluding borrowers who don’t yet have to make payments because they are still in school or within the grace period, more than a fifth—about 22%—are in default or forbearance, a program that allows borrowers to postpone payments for a period, typically for financial reasons.

It’s difficult to overstate just how much of a disaster this could be. High student loan payments influences graduate’s other spending habits. If people are being forced to devote large portions of their paycheck just to avoid defaulting on their student loans that is less money that can be devoted to purchasing a home, starting a business or buying consumer goods.

It’s little surprise then that the housing sector of the economy remains in a rut, that the number of business startups is down and that low consumer spending is one of the main headwinds to economic recovery. And the student loan crisis could prolong these troubling trends. Defaulting on a student loan could seriously damage a persons’ credit score, which could further delay the ability to make large purchases like cars and homes.

There are also serious repercussions for the fiscal health of the nation given that taxpayers are now on the hook when borrowers default following the government becoming the sole source of student loans.

To the extent that solutions have been discussed (which is not much) they’ve focused around fixing the symptoms of the problems rather than the problem itself. For instance, Congressional Republicans worked long and hard to secure a reform of the interest rates students pay on their loans. And Congressional Democrats have focused on pumping more dollars into programs like Pell Grants, which theoretically make college more affordable, though there is evidence that most colleges simply use additional federal dollars as a way to raise tuition while keeping the affordability factor the same.

But the real problem is the underlying cost of college, which is rising faster than health care costs, an issue that gets much more press. Little is being done to address costs because the President and his Democrat colleagues are so wedded to the current model that they are blinded to the opportunities. There is plenty of things that can be done, from the mundane—rreduction of the growing administrative bureaucracy, to the revolutionary—harnessing the power of massive open online courses (MOOCs) to reduce overhead and democratize higher education.

It is difficult to predict the colleges of the future. But we can begin by realizing the unsustainability of the present.