A Tougher Market for Student Loans
With April in full swing, a rising generation of future college and graduate students is combing through financial aid awards and contemplating the five- and six-figure of student debt necessary to becoming marketable in the global economy. The effects of the subprime mortgage meltdown have extended to the student loan market, with recent failures in the auction-rate securities market squeezing dozens of lenders out of federally-backed student loans and making other lenders choosier.
An article in the Saturday New York Times explores the effect of this credit crunch on families. With fewer options for federally-backed loans available, the NYT finds that universities are looking to make up for reduced lending options:
[M]ore than 100 colleges and universities have applied to participate in the direct loan program since the end of February, according to the department [of Education]. Ms. Spellings, the department secretary, has said the direct loan program could double the amount of new loans it makes to students, if necessary.Some commercial education companies have already taken steps to ensure that their students can find lenders, in some instances by preparing to make loans themselves.
Problems are more likely for those seeking private loans, which do not have any government backing. The terms of private loans, like other consumer loans, vary depending on the credit histories of individual applicants and in some cases can top 20 percent.
In the last several months, rates on those loans have risen by nearly one percentage point, according to research by Mark Kantrowitz, who publishes the financial aid Web site FinAid.org. Lenders have also tightened their standards, making it costlier for those with weak credit histories to obtain loans.
These developments are making financing a college education--an accomplishment that had already grown more difficult over the past decade (see item 1)--an even bigger challenge for middle-class families in the midst of a recession.
While the prospect of additional debt may not deter this year's crop of graduating high school seniors and
prospective graduate students from going to school, it will serve to limit their options once they're done.
Growing student loan debt might make financially riskier career paths like public service and entrepreneurship less attractive for many, an outcome with negative consequences for everyone. If student loan debt and tuition costs continue to rise at their current rate for another decade, could there be a lasting impact on an economy reliant upon the entrepreneurial energies of its middle class? Are the potential long-term systemic consequences of fast-growing student debt being short-changed in current discussions about the health of the economy?
Comments (9)
Yes, this is a problem. But you're framing it oddly.
Six figure student loan debt is usually incurred by people who go to private universities. In state students who go to their state supported schools get much better deals. While I wouldn't dare to doubt that it happens, I have a hard time believing that anyone goes 6 figures into debt just to keep pace with global competition because it's likely that the student went to an expensive private university and could have cut spent half the money at a state school. Unless you think that state school grads can't compete in the big leagues.
In any event, you're right that graduating with debt tends to limit one's career options. You suddenly need to make money to pay off the debt. Which is why people who go into public service jobs should have their debt forgiven.
Of course, that's tricky too. Most of us think that what we do for a living benefits society at large. And most of us are right.
Still, seems to me that our goal shouldn't be to subsidize Harvard undergrads. Instead we should use federal dollars to make the state university, college and community college systems either free or near free. That's where we're failing. So far as future careers go, I'm just not sure it's the government's place to say what career is and isn't so vital to society that debt should be forgiven.
But means tested debt forgiveness does make sense.
April 13, 2008 7:42 PM | Reply | Permalink
A couple of responses - the first very briefly on the private/public dichotomy. Given that private schools will have larger endowments - usually proportionate to their higher fees - it can often end up being the case that the sum of money a family will have to pay for tuition will be the same, regardless of whether they send their children to college at the local in-state university, or at an out-of-state private university.
The second on debt forgiveness. I agree that it's hard to determine who exactly should be deemed eligible - but I should point out that once the decision to forgive debt is made, it should be done fairly. Most forgiven debt is currently taxed as income. Someone earning $15,000 with a forgiveness of $20,000 would be paying tax disproportionately high to their (actual) level of income, which seems rather to ignore the whole reason that the debt is forgiven in the first place.
You might also want to consider the effect of the growing popularity of "unpaid internships". As competition among students for the top jobs has grown, the unpaid internship has trickled down, and permeated a growing majority of professions, so as to become a virtual eligibility requirement for employment after graduation.
Unpaid internships require that a student spend a summer, often away from home, working for no income whatsoever - placing a burden on the student to finance their vacation, while simultaneously loosing out on the opportunity to spend the time working for money to help pay their way through college. With the only option being to take a loan to pay for this, students are left with the unpalatable choice of graduating with even more debt (thereby restricting their employment opportunities as Destor points out), or graduating with no "experience" (thereby also restricting employment opportunities).
The American Middle Class have an unerring belief in the power of education (college), and hard work (internships) to yield results - so it seems unlikely that the prospects of accruing debt will deter them. But ultimately the realities of debt upon graduation will force them to avoid careers in important sectors: Government, Teaching, Medicine, Small private business.
Since companies are effectively getting free labor, interns should be legally required to be paid minimum wage. If companies can't afford to do this, then some effort should be made to make a shift from 'internships' to shorter, 1- or maybe 2-week programs of 'work experience' or 'work shadowing'.
April 13, 2008 9:52 PM | Reply | Permalink
A couple of responses - the first very briefly on the private/public dichotomy. Given that private schools will have larger endowments - usually proportionate to their higher fees - it can often end up being the case that the sum of money a family will have to pay for tuition will be the same, regardless of whether they send their children to college at the local in-state university, or at an out-of-state private university.
The second on debt forgiveness. I agree that it's hard to determine who exactly should be deemed eligible - but I should point out that once the decision to forgive debt is made, it should be done fairly. Most forgiven debt is currently taxed as income. Someone earning $15,000 with a forgiveness of $20,000 would be paying tax disproportionately high to their (actual) level of income, which seems rather to ignore the whole reason that the debt is forgiven in the first place.
You might also want to consider the effect of the growing popularity of "unpaid internships". As competition among students for the top jobs has grown, the unpaid internship has trickled down, and permeated a growing majority of professions, so as to become a virtual eligibility requirement for employment after graduation.
Unpaid internships require that a student spend a summer, often away from home, working for no income whatsoever - placing a burden on the student to finance their vacation, while simultaneously loosing out on the opportunity to spend the time working for money to help pay their way through college. With the only option being to take a loan to pay for this, students are left with the unpalatable choice of graduating with even more debt (thereby restricting their employment opportunities as Destor points out), or graduating with no "experience" (thereby also restricting employment opportunities).
The American Middle Class have an unerring belief in the power of education (college), and hard work (internships) to yield results - so it seems unlikely that the prospects of accruing debt will deter them. But ultimately the realities of debt upon graduation will force them to avoid careers in important sectors: Government, Teaching, Medicine, Small private business.
Since companies are effectively getting free labor, interns should be legally required to be paid minimum wage. If companies can't afford to do this, then some effort should be made to make a shift from 'internships' to shorter, 1- or maybe 2-week programs of 'work experience' or 'work shadowing'.
April 13, 2008 10:01 PM | Reply | Permalink
The internship problem that you bring to the table needs more of a solution than "minimum wage," though that's a start.
The problem with internships is that they allow rich young people who can afford to work for free to crowd poorer, possibly better qualified applicants, out of certain fields. Forcing employers to pay minimum wage is a start but it doesn't solve the problem -- rich kids can take poorly paying jobs that the rest of us can't. Maybe a living wage requirement?
Also, you're right about the tax implications of debt forgiveness. The obvious solution there is that forgiven debt shouldn't be taxed at all. After all, the money was borrowed based on an applications post-tax income. If I buy something on a credit card right now, the expectation is that I'll use my post tax income to pay the bill. If my credit card decides "Oh, we'll let you off the hook on that purchase," why should I pay taxes on that? I borrowed, intending to pay with post tax income. That's all that should matter.
April 13, 2008 11:58 PM | Reply | Permalink
To play devil's advocate for a moment - the only problem with enforcing stricter requirements for employers who take interns is that many smaller businesses will simply be unable to afford the costs. As I said, internships aren't just available at Goldman-Sachs: it has permeated the level of local law offices, architecture practices, engineers, etc. These smaller companies will not be able to pay the living wage requirement of, effectively, an additional employee. The result may be that they will simply stop offering internships, leaving only the "elite" (and usually, the well-connected) to secure positions at top firms during their vacations.
But let's be clear: internships - per se - are not a bad thing. If a college student wants to take an interest in a career, and work towards getting a job, then that should be rewarded. It is simply that the current system is discriminatory.
So perhaps there needs to be a compromise which allows the range of positions to be expanded - rather than diminished - while also providing a fair deal for students. If a living wage requirement were instituted, then perhaps some (or all) companies could be eligible for a tax break in return? And for those who need to be away from home in order to undertake summer work, accommodation should be more readily available. Some employers offer assistance in finding and paying for rented accommodation. Universities should follow suit, and be ready to keep their dorms open through the summer.
And again, if all this is still difficult for employers to afford, then there should be an expansion of short programs that give students some experience in a chosen field, without sacrificing months of earning potential.
April 14, 2008 7:03 AM | Reply | Permalink
Our whole educational system is on its head. On one hand we saddle parents and kids with debt to try to do what society exhorts them to do....namely get an education. On the other we have Private Colleges and Universities with endowments that range into the billions. Whats wrong with this picture and why is it like this? Why do you we as Progressives continue to support and feed the educational system?
We should strive to make higher education as open and available as possible. We have to stop having preferential treatment automatically for degrees earned by the "best" schools. There is nothing meritorius by graduating from an Elite school by being a legacy or having the right Prep school to your credit. This is one area that I find really splits the party. I come out by wanting to Nationalize Schools and pull those endowments into a general fund so that schools all over the US can benefit.
April 14, 2008 1:20 PM | Reply | Permalink
I have a hard time believing that anyone goes 6 figures into debt just to keep pace with global competition because it's likely that the student went to an expensive private university and could have cut spent half the money at a state school.
Well, that's your problem. Professional qualifications mean graduate degrees, and graduate degrees tend to mean six-figure debt. If you take those professional qualifications into the public sector, then you'll be paying off your loans for the rest of your working life.
For instance, a clinical psychologist working for the state or federal government needs the same doctoral degree as one in private practice, and the public/private institutional distinction really doesn't apply at the postgraduate level. While public-sector jobs have debt forgiveness options, places are very much limited.
April 14, 2008 2:32 PM | Reply | Permalink
Anecdotally, from a conversation overheard on the 1 uptown train a few months ago - some people were talking about a medical student who, after seven years of education, had managed to accrue... wait for it.... $700,000 of debt. No comment necessary.
April 14, 2008 2:59 PM | Reply | Permalink
Because of this, society can instead enjoy my contributions to the fields of chess, drugs, and pornography. No need to thank me.
April 17, 2008 2:39 AM | Reply | Permalink