Published: January 18, 2011

Part Three of a Three Part Series

Roadmap of article: This analysis discusses the role of student debt in the education system.  It argues that we should change the current law so as to allow student loans to be forgiven (or discharged, synonymously) through bankruptcy.  There are three primary premises which this analysis assumes to be true.  For the sake of brevity, they are not discussed.  If need be, the author is prepared to defend these assumptions.  They are as follows:

1.) We are producing too many degrees.  There are too many students and not enough workers.

2.) The cost of tuition is being artificially inflated by private lenders, who give hundreds of thousands of dollars to anyone with a heartbeat and an admission letter.  This results in tectonic pressure which will, eventually, jostle our fragile economy with unprecedented magnitude, resulting in unpredictable, novel, and extremely detrimental effects.  Some refer to this as a “bubble” which will “pop,” but bubbles imply whimsical innocence.  This is a very real threat.  Earthquakes are a better metaphor.

3.) Everything that Sir Ken Robinson says is true.

An Economic Earthquake

There is a tremendous amount of tectonic pressure in our economy.  Eventually, it will snap.  We saw it happen in 2008 when the market collectively realized that home lenders were drastically over-lending.  A similar, but more dramatic situation is brewing in student lending.  But unlike home loans, student loans are not forgivable by bankruptcy.  Unlike in the recession of 2008, the ensuing burden from the aftershocks of this earthquake will fall entirely onto the shoulders of borrowers – in this case, middle class Americans currently aged 14-28, all whom attended private or out of state universities.

There are arguments in favor of keeping student loans bankruptcy proof.  But these arguments miss the point, because they have a flawed and central assumption.  Bringing students under the protection of bankruptcy law is the most politically efficient way to provide the education reform that our nation so desperately needs.

But college is a good investment, right?

This analysis uses two sources as representative of the arguments in favor of borrowing for college – the College Board website, and an economist’s published arguments.

College Board

A prominent College Board webpage promises that “despite all the talk about high prices and price increases, a college education remains an affordable choice for most families…  Going to college is a wise investment in the future…  Although it’s normal to have concerns about borrowing money and taking on loan debt, it’s a viable option to help you achieve your academic goals.”  Here, the College Board is making an argument.  Impartial analyses don’t draw conclusions like “it’s a viable option…” after devoting less than a sentence to the issue: concerns about taking on loan debt.  This is misleading to the point of dishonesty.  Misleading would be to engage in a discussion, address the best arguments of the opposition, and to come to your own conclusion.  Dishonesty would be to argue that there isn’t even a debate.  Therefore, the College Board is dishonest.

Applying to college is like being lost at sea.  It’s mysterious.  Reliable information is difficult to find.  You don’t know what you’re doing, and your survival depends on it.  The College Board is the authority for high schoolers seeking help or advice on college, because the college board runs the SAT.  The College Board stands to make more money if more students apply to college.  Therefore, the College Board has a financial incentive to increase application rates.  This is where the College Board’s dishonesty actually begins to look like fraud.

The “Economic” Perspective

In a not unrecent piece from the New York Times, economist James Monks argues that college is a good investment.

To summarize Monks’s argument: the average debt amount upon graduation is $20,000.  The median income of college graduates in the workplace is $50,000 per year.  Therefore, it doesn’t take long for almost all graduates to escape debt.  In fact, when you multiply it out over a 40-year career, college degrees bring in an extra $800,000, when compared with high school diplomas.  Thus, college is a good investment.

Monks makes an elementary mistake of statistics.  He assumes that because the median debt amount is $20,000 upon graduation, this must be the amount for everyone.  This data is actually skewed right, with a still significant minority of individuals out on the right-hand extreme of the graph, deep beyond $50k, and for many thousands (if not millions), well into six figure territory.

Monks uses the median earnings of college graduates to support his argument – another significant error.  We’re not talking about college graduates generally – the analysis pertains only to recent grads – a group for whom the numbers are entirely different (and smaller).

Especially in the current economy, recent college graduates are having a difficult time finding anything except momentary full employment, or more long term underemployment.  For the purposes of advancing the analysis, we’ll assume that the average college grad makes a much more realistic (and still perhaps too generous) $35,000 per year, averaged out over the first four years of employment.

Economics traditionally uses cost-benefit analysis, but Monks inexplicably uses debt in place of cost. Certainly, if college cost $20,000 in total, the world would be a different place.  But in reality (which is, apparently, different than Monks-land) college at a private liberal arts school (like my alma mater, which is representative of private or out-of-state schools) costs roughly $40,000 per year, everything included.  Over four years, this comes out to a total of $160,000.  Adding in the opportunity cost of not accruing savings from working full time with your high school diploma ($20,000/yr * 4 yrs * 15% savings rate = $12,000), the total cost figure equals $182,000.

Assuming you were able to pull in a generous $10,000 per year working part-time or summer jobs, you may have around $6,000 in the bank.  By assumption, you’re making $35,000 per year for the first four years out of college, where 15% (the maximum allowed by law) of this revenue goes to loans.  In this (un-Monksian, but) more realistic analysis, at four years out of college, your debt is, at a minimum, $100,000, and there’s no end in sight.

As Monks so cavalierly writes, “Clearly, assuming a reasonable level of student loans is well worth the investment…  With a dose of caution and planning students should not be deterred from taking out loans for their college education.”  Americans who have six-figure student debt might laugh, cry, or both, at reading this statement.  Perhaps Monks lives in Monks-land, a magical place where the recession of 2008 never happened, where college costs $20,000 total, and where college grads get $50k/year jobs right out of school.

Two Categories of Students

1.) To be sure, many students finish unscathed.  They pay off their debts according to plan, and live happy debt-free lives.  If this sounds like you, then you may have attended college before 2004.  You probably went to public, in-state university.  You may have gotten financial help from family, scholarships, or both.  Congratulations on your hard work, and on your great decision-making.

2.) However, many students are less lucky.  They were told by experts that private or out-of-state college is a good investment.  But these students are sporadically underemployed, and often unemployed. They are choked with debt, and they blame themselves.

Monks and the College Board conveniently focus entirely on the success stories, and ignore the significant likelihood that any one particular high schooler will wind up in category 2, rather than category 1.

The 2 Reasons Student Loans Are Not Dischargeable Through Bankruptcy

1.)  Student borrowers have no credit, they have no skills, and usually have no reliable job prospects.  The only way to finance their education is to ensure that the students will be responsible for this debt.  Bankruptcy proofing balances the fact that loans are being given to “immature consumers of very expensive services,” as stated (on page 28) by John A. Hualpo, a representative for the banking sector, making an argument in a Subcommittee Hearing on our present issue. (Note the use of the word immature here. Both sides in this debate freely admit that student borrowers are immature. We’ll revisit this momentarily.)

2.) An education is (thankfully) permanent. Cars can be repossessed. Homes can be foreclosed upon. But there is no way to “revoke” a college education.

Neither of these two reasons matter.

Both of these reasons go to the goal of making loans available to vast quantities of students.  A central assumption of these two arguments is that anyone who wants to go to university should go to university – no matter the cost to the individual, nor the cost to society.

This would be like India asking, “How ever will we sustain our birth rate?”
This might be akin to a mortgage lender in 2007 saying, “How can we make it even easier for people to get home loans?”

The problem isn’t that we’re making too few students, the problem is that we’re making too many.  A bachelor’s degree today commands about as much prestige as a high school degree did in the 1970s.  Advanced degrees are becoming increasingly commonplace.  Teachers don’t stand a chance unless they have their master’s.  Law schools are pumping out far too many aspiring lawyers.  The only field which is exempt from this epidemic is precisely the field with the toughest entrance requirements – medicine.  We need less students and more workers.

We make too many students because private student loans are so…  easy…  to get.  Assuming you’re accepted somewhere, it’s harder to get a dollar panhandling on the street than it is to get a hundred grand in private student loans.

Allowing Dischargeability of Student Debt Will Cause The Following

Massive numbers of students will use the option.  When faced with making four figure minimum payments for over a decade, bankruptcy becomes one’s best option.  Almost all of these students will have attended a private or out of state university.  The “bubble” will “burst,” and banks will lose an enormous amount of money.  Bankruptcy law will blossom with activity.  Many students will get the first “F” of their lives, and it will be on their credit scores.  These students won’t be able to get a good rate on other loans for a long time.  They will bear a significant burden.  The only difference is that under bankruptcy, that burden will be surmountable, where previously, it was not.

Private lenders will go out of business, with collective losses around a trillion dollars, plus or minus a few billion.  With no private lenders offering easy money, students will have no way to pay hyperinflated tuition.  With almost no one to pay it, the price of tuition will fall across the country.  Far fewer students will go immaturely and hopelessly into debt.  The next generation of students will not be able to finance their dreams of an expensive college education.  Our economy will no longer be flooded with bachelor’s degrees which actual industry finds functionally useless.  Industry will spend less time training new workers, because instead of coming off four years of randomly selected major X, they will be trained in a particular field, with a renewed focus on workplace readiness immediately upon graduation.

Undergraduate education, for many students, has devolved into a four year party.  Most of education has decayed into nothing more than a beloved rite of passage.

Perfect Illustration of Education Reform

For these reasons, along with everything that Ken Robinson says, the education system in the United States needs a fundamental rebuild.  Anyone inside will tell you this.

There are few quick fixes for a system that needs such a fundamental restructuring.  However, bringing student loans under bankruptcy protection is the most politically efficient means of reforming education. This issue is the head of the domino chain.  Politicians can sign one single bill, which would start a chain reaction.  This chain reaction will change everything, and  for the better.  There is no single issue which is more central to the education problem in America.  If it’s naive to hope for a complete restructuring, nothing comes closer to a quick fix than this.

Our higher education system lures in high schoolers by the millions.  Everyone knows that these borrowers are immature.  Both sides of this debate freely admit that, frankly, these kids have no idea what they’re getting into.  Primary sources of information for these kids are the College Board and economists like Monks, and these sources are misleading to the point of dishonesty.  They are tricking children into a lifetime of indentured servitude.

In return, these children receive (after four years of partying) an intrinsically worthless degrees at astronomical cost.  17 and 18 year olds are not equipped with the maturity to fully comprehend the profound, lifelong commitment that goes with signing their loan documents.

No one really disputed that a housing bubble existed pre-2008.  It popped, and sent shockwaves through a fragile economy.  It is again undisputed that a much bigger bubble is growing in the education system.  The sooner these “bubbles” “pop,” the weaker the economic aftershocks will be.

Allowing student debt to be dischargeable through bankruptcy is the most politically efficient way to provide the reform that our education system so desperately needs.

Check back here at Pythagoreanism.com for more about the economics of education in America