Student loans have gotten a bad rap recently. In 2010, college loan debt surpassed credit card debt to become America’s largest aggregate of indebtedness. In 2013, college loan debt passed the $1 trillion mark. During and after the Great Recession, college spending was virtually the only sector of household consumption to continue growing unabated. William C. Dudley, head of the Federal Reserve Bank of New York, has highlighted these troublesome statistics in a groundbreaking criticism of how America does student loans.
Dudley has criticized government-subsidized student loans as being the only form of credit that has no adjustments based on likely ability to repay. Basically, anyone who wants a student loan gets the same government-subsidized deal. Regardless of academic aptitude, performance, or demonstrated work ethic, incoming college students are treated the same when it comes to loans. Often, they are treated the same when it comes to tuition and fees as well. While scholarships are certainly more often awarded to those who display aptitude, work ethic, and merit, these scholarships may be a drop in the bucket compared to baseline tuition and fees.
One major policy initiative to combat student loan debt has been the expansion of income-based student loan repayment. Instead of paying back a fixed amount, college graduates will have their payments capped at a certain percent of their income. While this would prevent college graduates from being swamped by debt payments, it does little to combat the insidious problems of rising college costs and declining real wages. Dudley points out that income-based repayment plans, or IBRs, will simply mean less revenue from college graduates…leaving taxpayers to foot the bill for more of America’s government-issued student loans.
Essentially, the burden of college costs is transferred from college graduates to other taxpayers, leaving problems unsolved.
While Dudley addresses a major problem, he does not offer solutions. Instead, he wants to research and explore how to fix the problem. One possibility the Federal Reserve should address is encouraging states to link college tuition and fees directly to academic performance, thereby providing incentive to pursue academic proficiency.
Another thing that must be pursued is an elimination of rampant grade inflation at the secondary and post-secondary levels. Allowing the skill and aptitude of “graduates” to decrease lowers their ability to succeed at the next stage of life and decreases the demand of labor by firms. Why hire workers and pay them well if they lack skills and critical-thinking ability? Churning out an excess supply of college graduates has lowered the wages of this labor group, both through increased supply and decreased demand. Income-based loan repayment for college loans only works if college graduates can earn real income, meaning we must restore value to a four-year degree.
Finally, the government must be willing to limit its student lending and its subsidies to colleges and universities. By freely pumping out money to colleges and college students, Uncle Sam has allowed for the hyperinflation of college costs and the erosion of real wages and the value of college credentials. While it is not popular to say so, it is time to pump the brakes on college spending. Kudos to William Dudley for speaking out.
