Government Fingerprints on the Student Debt Crisis

A huge concern at colleges across the nation, both public and private, is the affordability of college. A connected concern is the ballooning amount of student debt. Both of these intertwined problems are rightly framed as crises. The rise in student debt is pushing marriage later, damaging the integrity and centrality of the family. Debt has strong links to “depression and thoughts of suicide”, according to Elizabeth Sweet, lead author of a Northwestern study. Increasing levels of student debt also are crowding out certain types of spending that are main drivers of industry in our economy. Unaffordable education pulls the rug out from under many intelligent individuals born into unfortunate circumstances. All in all, we have quite an unfortunate situation occurring in this land of opportunity.

But while the general public, the institutions, and the media seem to be hitting the nail on the head when it comes to the sense of crisis, they seem to be a little off the mark when it comes to solving the problem. The go to solution for most pundits and columnists: keep the student interest rate low! Like most popularized policy solutions, the idea is presented as a free lunch. Students can defer payment until they are making money, government will eventually be paid back, and there will be no negative consequences. This policy and corresponding argument ignores several key things, including:

-The government influence on college affordability

-the destruction of debt as a calculated tool, and the removal of market mechanisms that make the tool work

Government influence on college affordability is the biggest ignored factor. It is important to recognize that the government does provide a meaningful role in lower-level education: it provides tax-payer subsidized education that is regionally uniform, accessible, and provides mental tools that allow people to participate meaningfully in our democracy. There are of course problems with our system, but that is a different matter. Government involvement in higher education becomes more complicated, because unlike k-12 education, higher education at least in the university sense, is not wise or meaningful choice for everyone. Yet, the government, well-known individuals in society, and the universities themselves brand a degree as the best option regardless of circumstances. This blanket approach ignores individual preferences, and paints over those with valuable mechanical and “blue-collar” skills. The economic result, is that government influence has increased demand for a college education.

But the problem runs deeper. Not only is demand artificially higher than what would be without government intervention that same demand has been made mostly inelastic. In other words, willing to pay any price. Government has a hand in this demand inelasticity as well. By providing aid in the form of grants, loans, and other options the federal and state governments separate students from the cost of education. It is arguable whether or not grants are a good policy, but in the case of loans, the government is only temporarily separating the student from the cost, by allowing forestalled payment. In this case, the student does not fully calculate the burden of such debt. He or she is also influenced into incurring more debt than would otherwise be the case by the portrayal of student debt as an acceptable type of debt in all situations and in any amount. The media, prominent figures, and the government again have done an excellent job of portraying the decision to take out debt as out of the hands of students, and in the hands of corporations or other nefarious entities. And while the current government created situation is unfortunate for students, it is still within student’s power to make smart decisions on where to go to school, when to work, and when to opt out of a college education.

And while there are certainly situations where student debt is a wise decision (given considerations of future earnings, etc) current conditions encourage students to believe student debt is always the right decision. One offshoot of this is the proliferation of students using student debt to support, “a lifestyle”.

Finally, the issuing of easy credit through submarket interest rates on federal student loans is the final fingerprints of the government on our current crisis. It sounds terrific to advocate for lower student interest rates, but all this truly does is crowd out private bank loans and further encourage the degree at any price mentality. With the market tool of interest rates so destroyed, with the government injecting the public with the false salvation of a degree, and with the social changes  surrounding student debt, it is obvious why we face our current crisis, and it is obvious that government plays a key role.

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