The effect of America’s student loan program on our country’s young people is ground well covered. It is a $1.3 trillion mess with tentacles hurting spending power and reaching all sectors of the U.S. economy. The housing market, the stock market, automotive sales, holiday spending and new business innovation are all stifled when recent graduates are forced to start paying down the interest on their higher education costs.
Ironically, the biggest victim in this whole scenario may be the colleges and universities who are charging outrageous tuition in the first place. For the sakes of both the schools and the students, the country has to fix this.
Before the Higher Education Act of 1965, colleges (especially private ones) received little federal government assistance. They were bastions of white male privilege that countered the aims of President Johnson and his Great Society for a more egalitarian society. With admirable intent, Johnson pried open the doors of academia to all genders, races and ethnicities. It was paid for by having students take out loans rather than receiving grants, ignoring the successes of the G.I. bill that had offered grants to millions of returning soldiers.
The student loan program created perverse incentives. Colleges soon realized that any increase in tuition would be covered by students’ ability to borrow from the government. Tuitions shot up, never to come back to earth. Families bought into a culture of debt, accepting borrowing as the price for upward mobility.
But colleges are now finding a downside. They educate students choking on debt. The slightest disruption at a college causes students to rethink their attendance. Once rare, transfers have climbed. Students increasingly vote with their feet, some drop out due to cost.
The student debt subsidy of $100 billion a year flowing into colleges has encouraged unhealthy risk taking. It has facilitated a construction boom on many campuses as competition heats up for the best-looking buildings offering the most up to date facilities from labs to climbing walls. College must pay interest on construction bonds and set aside funds for long term maintenance.
At present rates of increase, tuition will top $100,000 annually within the next decade. For the top 200 colleges, their reputation will probably allow them to get that price. But for the rest of the 3,400 institutions, it poses a big risk.
It is past time that officials intervene to save colleges from these self-inflicting behaviors. Colleges must prepare for enrollment declines over the next five to 10 years based not just on demographic changes but also on a slowdown in student loan growth. This could result from a tightening of federal policy or from a reluctance of families to keep borrowing.
Ultimately, our courts and free-market system may wipe away large swaths of student debt. It is only worth cents on the dollar in the marketplace, so it’s better to liquidate at its true price than have it burden our future. It is going to cost taxpayers to put our colleges on a surer footing. Student debt forgiveness will come at a heavy cost. Emergency aid to colleges may also be needed.
In the end, it will require a grand compromise, balancing government aid against tuition reform. We have little choice.
(PHOTO) Charles F. Desmond, at right, is CEO of education nonprofit Inversant. Robert Hildreth is a past member of the executive committee of the Boston University board of directors, and is board chairman of Inversant.