Do student loans need a bailout, really?

Abstract

·         Recalls the National defense reason for student loans.

·         Deconstructs the current “debt bubble”.

·         Challenges the terms “debt erasure” and “average” used to confuse discussions.

·         Restates average student debt, employment preferences and wage differentials used to justify college attendance.  

·         Reviews the NPV of student loans in light of existing forgiveness plans and inflation.

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The National Defence Education Act (NDEA) was passed in 1958 in response to Soviet acceleration of the space race with Sputnik. The bill funded programs to “ensure trained manpower of sufficient quality and quantity to meet the national defence needs of the United States.” The legislation bolstered education in the areas of science, mathematics, and modern foreign languages.[i]

Our Student loan debt is close to exploding claim many politicians. A Ukrainian folk story, “the Mitten” illustrates how Stem based loans drifted to any-degree-at-all loans.

In the story a young boys lost mitten is found by a mole who climbs in to stay warm. Successively larger animals seek room in the Mitten. Each animal is larger, a rabbit, a badger and finally a Bear.   The ever-stretching Mitten explosively unwinds when the last animal, a mouse seeks to enter, and all animals run away in the cold. (60 words)

April 7 Consumer Credit shows there are 1.747 trillion in student debt. DC has a myopic view of the problem, seeing one large debt. Within this sum are variations of loans, public and private, payment histories, degrees, and payment plans.

Taxpayers are not responsible for private debt held by banks. Signing for a loan to achieve an advanced degree by a twenty-two-year-old isn’t done in ignorance and is not our responsibility.

Once private loans and graduate student loans are deducted from the total, The federal program is roughly 1.47 trillion. This tracks with a March Liberty Street survey of student debt that estimated the cost at 1.49 trillion. The results correlate. Other reports will differ depending on the age of the data and the editorial intent.

This is a debt that can be erased with a “flick of the pen”, says Chuck Schumer.[ii] The reasoning is faulty. The Federal budget expects repayment, debt is not increased but revenues are choked. The impact is immediate and the payment expected.

The complexities of the Student Debt are simplified for the news writers and readers by moving details into the aggregate average abyss. “Average Student debt”, “Average Unemployment” and “Average wages” are headlined without context. Taking from this “average”  misery well are tragicomic stories emotionally illustrating individuals’ plights.

In 2011 at Occupy Wall Street, married grad students with an Ivy League Masters in Sociology expressed their fears to a reporter. ‘Do we eat beans for the rest of their lives to pay off $100,000?’  In 2022 a TikTok posting showed a Woman behind a sign “B.A. in Fine arts, 29,000 in debt and no job”.

“The average student debt is $28,000 to 31,000.” [iii]Students may need to borrow low six figures for a Veterinary or Law degree, low five figures for a bachelor’s or master’s or a modest 4 figure sum to complete a  Community College Associates degree. They all contribute to the total debt from which the “average” debt is calculated.

Assessing the value for the price of a college degree is difficult. Nationally only 62% of students enrolled in college finish in six years. Ten percent remain enrolled, and 28% leave and never return.[iv] Dropouts keep the debt. Roughly ten percent are default when they begin payment. [v]    

Workers with college degrees have lower unemployment rates. True in the aggregate. Within all BA degrees, there is higher unemployment and underemployment. Inside Higher Education Summarized the New York Fed report “about 41 percent of recent college graduates -- and 33.8 percent of all college graduates -- are underemployed in that they are working in jobs that don't require a college degree”[vi].

A February 2021 chart from the NYFED identified the employment and underemployment for seventy-two studies. Civil Engineering, Elementary education, Nursing, and Computer engineering had the lowest underemployment highest employment and salaries. Degrees in Fine Arts, Performing Arts, General Social Sciences and Anthropology had the highest unemployment, underemployment, and lowest wages.

With data current to October 2020, Think Impact reports ‘those who are between the ages of 22 and 27, bachelor’s degree holders earn an average median income of $44,000. In contrast, high school diploma holders only earn an average of $33,000 ($15 per hour) annually.[vii] Contrast that with a current Zip Recruiters 2022 report that national average for diploma holders is 41,000 ($21 per hour) annually.[viii]

Fact, High school graduates after 4 years will earn more than the General Social Sciences BA, without the same debt. Does a college degree increase human capital, or signal employers a worker’s maturity? The wage difference between degrees answers the value question. Clearly the intent of the originating act was to build human and therefore national capital for solving future problems. It was not to “find your passion”  or more “fully develop your person” as colleges suggest.  

There are multiple loan plans, and payment schemes.[ix] Perkins loans for a 10-year payout at 5% which expired in 2017 are still in the debt totals. Subsidized and Unsubsidized Direct loan program and Parent Plus loans follow Federal Student Loan Rates for loans first [x]disbursed July 1, 2021, through June 30, 2022

Direct Loan Undergraduate                         3.73%

Direct Loan Graduate                                     5.28%

Parent PLUS Loans                                           6.28%[xi]

The average student loan is paid off after 20 years. Interest on loans do not accrue while in school. Preferred loan rates benefit by a loan balance decreasing in a present value by inflation whether it is the Federal reserve goal of 2% or current levels. The college graduate of 2022 has the first dollar of their 2018-2022 loan package worth $.94 due to inflation compounding for four years. What will the inflation versus interest spread be for 2023? 

Forgiveness Programs include Both the Income Driven Debt (IDR), and Income Based Repayment plan (IBR) allow debtors to pay based on discretionary income. The 10% or 15% plans. These fold into the Public Service Loan Forgiveness Pan (PSFL) which expunges the debt while paying for 10 years in a not for profit or other approved employments. Less than 10% of eligible students applied for these programs.

The student loan program is untethered form the reality of price and value. The Administration of the Student Loan Program as a social Program created the student Debt problem. Private gains are paid for by the public. Debtors already receive preferential financial terms. The biggest benefactor of a Bailout is the Federal government to wipe out the mess they have created

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[i] National Defense Education act. US House of Representatives: History, Art & Archives. (n.d.). Retrieved April 27, 2022, from https://history.house.gov/HouseRecord/Detail/15032436195

[ii] Schumer, C. (2022, February 28). With the flick of a pen, president Biden could #cancelstudentdebt-a burden that falls especially hard on black borrowers.from me and @DERRICKNAACP:https://t.co/i4mbtfz8ym. Twitter. Retrieved April 27, 2022, from https://twitter.com/senschumer/status/1498336892458315785?lang=en

[iii] Hanson, M., & Checked, F. (2022, April 11). Student Loan Debt Statistics [2022]: Average + total debt. Education Data Initiative. Retrieved April 27, 2022, from https://educationdata.org/student-loan-debt-statistics

[iv] Schaeffer, K. (2022, April 12). 10 facts about today's college graduates. Pew Research Center. Retrieved April 27, 2022, from https://www.pewresearch.org/fact-tank/2022/04/12/10-facts-about-todays-college-graduates/

[v] Hanson, M., & Checked, F. (2021, December 19). National Student Loan Default Rate [2022]: Delinquency data. Education Data Initiative. Retrieved April 27, 2022, from https://educationdata.org/student-loan-default-rate

 

[vi]. The labor market for recent college graduates –

Federal Reserve Bank of New York. (n.d.). Retrieved April 27, 2022, from - https://www.newyorkfed.org/research/college-labor-market/college-labor-market_unemployment.html

[vii] College graduates statistics. ThinkImpact.com. (2021, September 22). Retrieved April 27, 2022, from https://www.thinkimpact.com/college-graduates-statistics/#3-college-graduate-statistics-breakdown

 

[viii] High School Diploma Salary - ZipRecruiter. High School Diploma salaries. (n.d.). Retrieved April 27, 2022, from https://www.ziprecruiter.com/Salaries/High-School-Diploma-Salary https://www.ziprecruiter.com/Salaries/High-School-Diploma-Salary

[ix] What are federal parent plus loans and how to apply?

Edvisors. (n.d.). Retrieved April 27, 2022, from https://www.edvisors.com/student-loans/parent-student-loans/introduction-to-federal-student-loans-parent-plus-loans/?google=amp