The College Debt Delusion

Per Chad's post from last week about the way the U.S. Department of Education seems to be going out of its way to explain away the recent rise in student loan default rates as a hurricane-driven, one-time-only, move-along-nothing-to-see-here phenomenon, and Erin's earlier analysis showing that the most commonly-used default measures badly understate the true extent of the problem, it's worth wondering what exactly, motivates this tendency to talk down the reality of loan default. And I think the answer is pretty obvious: college prices have been increasing steeply for a long time, nobody knows what the heck to do about it, and so people want to believe that default rates are low because that's the only way to sleep at night. 

To review: From 1988 to 2008, average tuition and fees at public universities more than doubled in real dollars. Median family income and spending on student financial aid did not rise as fast--not even close. And so a greater percentage of students had to borrow greater amounts of money to make up the difference. According to the College Board, 26% of student attending public four-year universities borrowed in 1993. By 2004, that number was up to 47%, at the same time that the average real-dollar amount borrowed grew by 36%. When the latest numbers are released soon, I expect they'll be even larger. In just the last eight years, total annual combined public and private student loan volume increased from $42.5 billion to $78 billion in constant dollars. 

These numbers are troubling for all kinds of reasons and there's no end in sight. Colleges and universities have a tremendous amount of leverage in setting prices; they're heavily subsidized by the public, protected from traditional competitors by high costs of entry and from non-traditional competitors by high regulatory hurdles, and in the business of selling a must-have, globally coveted product whose value continues to grow. There are ways to break the pattern of constant price escalation, which I'll explore at greater length in a magazine article next month, but in the short-to-mid-term it's a safe bet that the student debt problem will be with us for some time and will only become more acute.

But as long as students pay that debt back, universities and lawmakers can tell themselves that it all worked out in the end. Sure, it was expensive, and sure it was burden to repay. But it was all worth it, right? The students got a valuable degree, everyone got paid--what's the problem, really? 

Never mind for a moment the interests of efficiency and equity for low- and middle-income families. Never mind that it's perfectly possible to borrow way too much money and still pay it back. The illusion of minimal student loan default rates is just that, a mirage and a veil, one behind which the reality of financially overwhelmed students is becoming more obvious by the year. But people don't want to know that, because then their failure to solve the higher education cost spiral--and in some cases their complicity in sustaining it--would itself become a much heavier burden to bear.