Over at NRO yesterday Jay Hallen proposed a few solutions to easing
the student-loan bubble. Though his impulses are
correct his recommendations fall flat.
Hallen first proposes that the Department of Education
move to a “risk-based pricing” system in which it would consider a
student’s high-school GPA or intended major in determining the loan price.
Students with lower GPAs would not receive favorable terms on their loans and
would thus choose to attend a trade school rather than college; this, in turn,
would help ease the growth of loans and college tuition.
There are two problems
with this argument. One, given the grade inflation that pervades American
schools, high-school GPA is hardly determinative of future success. Likewise,
the major students choose before they enroll indicates neither the major that
student ultimately chooses nor, even if the student sticks with the major, his
future success. One could instead imagine using standardized scores as a
benchmark, but the well-documented racial disparities in SAT and ACT scores
would translate into less favourable terms overall for blacks and Hispanics–an
outcome the DOE will never accept, much less the Office of Civil Rights.
The second problem with this suggestion is more
practical: shunting students into trade-schools will be no means defuse the
student loan bubble. Under the Higher Education Act of 1965, the federal
government provides loans to students attending both traditional colleges and
vocational schools. An influx of students into “non-traditional”
institutions would reduce neither students’ overall debt load nor the
ever-growing loan bubble.
Hallen’s second suggestion is to allow students to
discharge their loan obligations once they declare bankruptcy. If enacted,
however, this provision would only increase the bubble, as students could
assume much more debt, knowing that if they run into trouble with repayment
they could simply declare bankruptcy and rid themselves of all obligataions. In
essence, loans would become cost-free, and would become tempting to risk-averse
students. Implementing this idea would only accelerate the bubble.
His third suggestion is his most audacious: encouraging
alternative financing arrangements, such as those promoted by University of
Chicago economist Luigi Zingales, which have investors financing students’
education in exchange for a specific percentage of the student’s income for a
specific time period. While this arrangement would indeed allow investors to
loan on the basis of calculated risk, it’s by no means clear these arrangements
will ever become so widespread as to have any impact on federal loaning
patterns. Both students’ and families’ discomfort with these programs, and the
fact that these programs see themselves as supplements to federal aid rather
than replacements, indicate that they do not present a solution to the bubble.
It will take hard work to devise a solution to the
mounting student-loan crisis. The bedrock principle of any reform to the system,
though, should be ensuring that the remedy doesn’t exacerbate the symptoms.
Jay Hallen’s proposal is unworkable. What will happen is any more complicated system that tries to distinguish between student loan applicants based upon their future employability will quickly devolve into the system we currently have.
The government will never be able to distinguish between students who are likely to be employable after graduation and those who are not. A high school grade point average means very little in predicting success because different high schools, and different teachers within a particular high school, have different standards for grades. The only uniform standard that is widely applied is the SAT. That test is specifically designed to predict how well someone will do as a freshman in college, and is highly predictive. However, there is no political consensus for basing student loans on how well someone scores on an SAT.
This system is ruining the lives of debtors because they cannot find jobs to pay these loans and the loans are non-dischargeable in bankruptcy. This is preventing them from forming families, buying houses, and joining society as productive members. Instead, we are left with large numbers of young people who are hopelessly in debt and living in their parents’ basement.
I propose that we adopt a three-step plan for dealing with student loans.
First, we abolish all federally guaranteed student loans. That will cause the cost of college to drop dramatically because there simply will be no buyers for colleges that continue with their current tuition levels.
Second, we allow student loans to be dischargeable in a Chapter 13 bankruptcy so that the debtor has to pay something against his or her loans that is within his or her means.
Third, we impose an excise tax on colleges and universities measured by their current endowments so that the universities and colleges will collectively repay the federal government for all of the loan guarantees that will go bad. These universities should pay for the carnage caused by this system because they are the ones who benefited through charging high tuitions.
Judah,
Thanks for your comments to my article. I would add the following points as a response:
-I didn’t get into this, but I would certainly propose penalties for students who change their majors, such as losing their favorable rate, and even retroactively repaying the difference in interest rates. I was trying to keep to 1500 words so I didn’t get too much into the weeds of ancillary policies as I would have liked.
-I hear you on the GPA inflation, but I’m not convinced it would play out that way. Can schools inflate the grades of all students? I have a feeling the top students (and their parents) wouldn’t stand for that. In any event, if inflation were a genuine problem, I would alter the proposal to refer to class “percentage” – i.e. the top 10% of the class could serve as a proxy for the top GPA levels – this would eliminate the inflation problem, while retaining the spirit of my proposal.
-Re: Zingales’s equity idea, you say there’s no evidence of it becoming widespread enough – but if no one ever tries, how do we know? The chance of it not gaining popularity does not make it bad policy. I also concede in my article that investors would be attracted to this mostly for business/law/medicine/engineering students, but those still make up a sizable chunk.
-Re: bankruptcy, I concede that in theory, implementing it could increase the bubble. But with a trillion dollar bubble, how much more can students realistically be “holding back” on the loans they take out? Perhaps I would revise my proposal: allow bankruptcy only after a 10-year (or so) period, for borrowers who have made a good-faith attempt to stay current; and only allow a bankruptcy judge to discharge amounts over (perhaps) $25,000, so students are still on the hook for something – and even make the university liable for a certain portion over $25K as well. The last two points were great ideas suggested by someone in the comments section of my article, and would create incentives for students, lenders, and collges alike.
-I would never advocate a circumstance in which government could pick winners and losers, and if I come across that way, then I should clarify: I advocate using data from the Bureau of Labor Statistics solely because I assume that the BLS is a non-partisan supplier of data. If in truth it has been “captured” by political forces to project job growth that meets ideological ends (i.e. more government workers) – and I am simply unaware if this is the case – then I would advocate some other independent group to supply the labor statistics on which a risk-based pricing system can be modeled.
-I agree that a student’s choice of major does not assure future success. But I’m working with the little data we have available to create a risk-based pricing solution. I have no data to prove this, but can we agree that a student majoring in engineering likely provides better ROI for the government than one majoring in, say, sociology?
Best regards,
Jay Hallen
Students can always change their majors, even after they’ve declared. Unless there’s some legal consequence to changing one’s major–and Hallen suggests none–there’s nothing to stop students from gaming the system.
Moreover, an individual’s choice of a potentially lucrative field doesn’t guarantee success in said field. So I see no reason to believe that selecting students for preferential rates based on major will yield a better “return” for the government. Indeed, this element of Hallen’s scheme assumes government has far greater predictive abilities than it actually does. In reality, Washington has a very bad history when it comes to picking winners.
What about Hallen’s proposal about using BLS data to align students with certain majors to preferential loan rates? He spends more time discussing that than GPA issues. Would that not create more equilibrium in the workforce?