Student Debt: Misused, Misunderstood, and Menacing
Student loans seem as natural a part of the college experience as textbooks and pizza. But while student loans can be framed as the necessary tool that pays for a worthwhile education, the student loan system is deeper and darker than most people realize. A system that was built with the best intentions is now a bloated and complicated disaster that has trapped millions of people.
The student loan program was started in 1958 Federal student loans under the National Defense Education Act to push talented math, science and engineering students through college to help with the Space Race. In those days, the loan programs were limited, but they could afford to be; for decades, students could work minimum-wage jobs part-time during the school year and easily cover the ager cost of tuition and housing, but today’s student working the same hours at minimum wage can only pay 60% or required expenses.
College simply isn’t as affordable as it used to be; interestingly, we’ve made it more a cultural and financial requirement for the Modern American Dream. Making the problem worse is that because tuition is unaffordable, and loans are being offered to almost all students (either publicly or privately), schools are all but promised that they would be paid whatever rate they set, so consumers and the market have almost no say in what tuition should be.
There are thousands of studies, stories, and testimonials that display how hard excessive student loans can be on individual borrowers. Variable APRs on privately-held loans, unclear loan terms, and uncooperative loan servicers are only making the problem worse, and the students who choose (or are forced) to take these loans feel the squeeze every day. But the darkest issue surrounding student loans is not what it does to the student, but what the massive — and, more importantly, wide-spread—debt is doing to our economy as a whole. Money that borrowers might spend on goods is instead being spent on repaying student loans.
According to the spending multiplier and the long-followed philosophy of trickle-down economics, a healthy economy requires that people participate in the consumer market. Money that can’t be released to the market is instead sent back to the federal government and other institutions, where it does nothing to create more wealth. People whine about Millennials staying home well into their 20s and their inability to buy houses, forgetting that many Millennials are paying such high amounts on their loans that they can’t save for a down payment. While individuals who owe on student loans feel the effects most personally, our entire economy suffers from this burden.
All of that said, there aren’t a lot of immediate solutions to the student debt crisis. Eliminating loan programs will keep low- to mid-income families from going to college. Expanding loan programs will only make the debt problem worse. Erasing or forgiving student loan debt entirely cripple the federal government. And asking schools to lower prices would likely result in cuts that would hurt students—schools will probably funnel what money they can still charge into attractive, non-academic money-makers like new stadiums.
Students should think carefully about their choice to attend college at all. Some kids truly and honestly are academically and socially prepared for the university experience, but some simply aren’t. Families, individuals, and we as a society need to be better at recognizing that all (productive) paths for high school graduates are valid.
But that doesn’t mean that students should be scared of going to college – or even scared of student loans. College degrees are still useful, and student loans might still be necessary for Just like everything else in life, student loans are not necessarily dangerous if used in moderation and with consideration. A good rule of thumb (which is not taught to students, interestingly) is that an undergraduate student should not borrow more in loans in their educational career than they can reasonably expect to make in their first job after college. That requires that students do some research and build some financial literacy skills, but that’s not too much to ask. In fact, it was my own student loan debt that forced me to become financially literate, and I’m weirdly thankful for the entire experience.
Today’s students get a raw deal. They were told that college is the only way to be successful and that loans are the only way to finance the necessary costs. But they’re not taught what a loan really is and what the big numbers on their loan statements really mean. Students are pushed to improve their college applications with extra-curricular activities but don’t know the value of a dollar.
They want to pay for and receive a good education, but colleges around the country spend their tuition payments (and loan disbursements) on eye-catching gyms and tech that attract more students but do nothing to teach anyone. This is not a mess that can be solved this year, this decade, or maybe even this generation. But if we look at the real issues and recognize that neither total reliance on or complete forgiveness of student loans is going to work, we might be able to restore the program to its humble origins and turn this weapon into a tool once again.