By now you likely know the statistics. College is more expensive than ever, with tuition and fees having surged by 225 percent over the last 30 years. There are more indebted students than ever, with 43 million current student borrowers, a 92 percent increase over the last decade. The total student debt total is larger than ever, with more than $1.3 trillion in loans outstanding, a figure that has tripled over the past 10 years. And the student loan default rate is higher than ever, with more than 27 percent labeled as delinquent.
Obviously, something has to change. Unfortunately, as Laura Shin writes for Forbes, colleges aren’t getting the message:
But surprisingly, public and private schools (not community colleges) have increased their spending per student since 2000. Why, if revenues had slumped, would colleges spend even more? In short, because colleges with star faculty, climbing walls and other amenities boost their prestige and ranking and attract more applicants. All that makes them more competitive, which, in turn, allows the colleges to choose only the best students — and the best students are the ones who come from the wealthiest families.
But it’s hard to fault colleges for continuing to throw money at amenities when lenders are throwing money at students. Shin continues:
Aside from hidden prices and spiraling spending at schools, costs are exacerbated by the reckless way in which student loans are awarded. Because student loans cannot be discharged in bankruptcy, “lenders don’t have any reason to apply any discipline when they’re lending out money to students,” said Kamenetz, though she does note that after financial crisis, lenders did tighten their requirements. “They don’t have to do any consideration of whether that student has a good chance of getting a degree or whether that degree has a good chance of getting them a good job. It’s basically play money with no consequences.”
Fortunately, the issue of college pricing and a broken incentive structure is becoming one of the defining issues of the 2016 race. All of the candidates clearly recognize that in order to woo the Millennial vote, something has to be done to address one of their key challenges. And there seems to be a growing realization that an overly indebted generation ripples through the economy in negative ways. Home ownership rates, retirement savings, and new business formation are all down among Millennials, the result of stagnant wages and high student loan debt.
Unfortunately, many of the candidates’ plans would make the situation worse, not better. The USA Today’s editorial board writes:
Not surprisingly, the leading Democratic presidential candidates — Hillary Clinton, Bernie Sanders and Martin O’Malley — have come up with plans they say will make colleges more affordable and provide debt relief for millennials. Though well-intentioned, their plans threaten to drive up costs rather than rein them in. They would all throw more federal money at colleges while offering little but hope that these institutions would hold expenses down.
If history is any guide, colleges and universities will channel much of the additional money into areas that don’t directly benefit students. They might also hike tuition, telling students not to worry because taxpayers will pick up much of the additional burden. A Federal Reserve Bank of New York report found that colleges increased tuition 40 cents for every dollar received in Pell Grants, and 65 cents for every dollar in subsidized loans.
The paper is most bullish on Clinton’s plan, saying it is “the most practical.” But at its core, the paper writes, the plan “still amounts to taxpayers spending a lot more money without concrete efforts to make colleges control costs.”
There is a practical path forward. As Mitch Daniels, the former governor of Indiana and current president of Purdue University writes for the Washington Post:
Income-share agreements, under which a student contracts to pay investors a fixed percentage of his or her earnings for an agreed number of years after graduation, offer a constructive addition to today’s government loan programs and perhaps the only option for students and families who have low credit ratings and extra financial need.
From the student’s standpoint, ISAs assure a manageable payback amount, never more than the agreed portion of their incomes. Although every provider is different, terms tend to range from 5 percent to 10 percent of income for 10 to 15 years, or somewhat higher (10 percent to 15 percent for shorter contracts such as five to seven years). Best of all, they shift the risk of career shortcomings from student to investor: If the graduate earns less than expected, it is the investors who are disappointed; if the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms. This is true “debt-free” college.
Republicans like Sen. Marco Rubio and Rep. Mike Petri already have legislation to define and foster these types of agreements. While Democrats chase their tails by introducing further subsidization schemes, other Republican candidates should follow Sen. Rubio and look for ways to allow for a truly “debt-free” option for students.