Student loans are once again in the news, with the Obama Administration proposing to add some five million individuals with outstanding loan balances to the Pay as You Earn (PAYE) plan. The plan caps student loan payments at 10 percent of income, and loan balances disappear after 20 years (10 years for persons working in the public sector). Most students now taking out loans can already access PAYE, but many of those with older loans have not been eligible. In addition, many students with loans are unaware of the PAYE option. The new proposal would enhance both the availability of the program and efforts to make students aware of its existence.
As a White House fact sheet puts it, tuition is up more than 250 percent over the past 30 years while average income levels for typical families are up just 16 percent. It’s therefore no surprise that debt has become an extremely common aspect of higher education. More than 70 percent of persons earning a bachelor’s degree take on loans to do so, with an average balance of close to $30,000. Clearly, having to repay these loans may delay other purchases such as houses or cars. There are also plenty of examples of people with debt far outstripping their ability to pay.
Enhancing educational attainment is beneficial to individuals, businesses, and to society as a whole. Those with college degrees (or even some college attendance) are far less likely to be unemployed and tend to earn substantially more over their working lives. Recent academic studies have confirmed these long-held truisms. Within these definite overall relationships, however, is a wide range of outcomes for individuals. Employment and earnings are driven by many factors (personality, work ethic, choice of career, location, and much more). College attendance is only one aspect of future wages, and simply receiving a degree is no job guarantee.
While helping people hamstrung by student loans is certainly a worthy societal goal, this area is one where we should tread very carefully. The PAYE plan distorts the decision process, both before and after college. Knowing that future loan payments are capped at 10 percent of earnings and that balances will go away entirely at some point in time makes debt a much more attractive option. Whether the balance is $20,000 or $1,000,000 suddenly is less relevant. Upon entering the workforce, some of the pressure is also off to obtain a well-paying job. By reducing the potential fallout from over-borrowing, there is a very real risk that the problem of ballooning student debt will grow even worse. The difference is that taxpayers will be picking up more of the tab.
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Another initiative of the Administration which has the potential to help with the student loan situation was introduced last August. Part of what was announced is a ratings system for colleges, which would include data on average tuition and debt as well as outcomes (such as graduation rates, graduate earnings, and advanced degrees). Unlike PAYE, an effective ratings system would improve the loan decision process for students and their families. Currently, it is difficult to compare colleges on equal terms, particularly in the area of outcomes. Cost calculators are on college websites, but the other end of the equation (what the benefits of degrees will be in terms of earnings) is harder to get. While there are certainly other notable reasons for pursuing an education, financial rewards are a key determinant for many students in their decisions.
The Texas Higher Education Coordinating Board has some very helpful information, but naturally it’s only for public colleges and universities. There are various databases that get at typical salaries for graduates of individual colleges, but they typically don’t get down to the level of specific degrees. Although it may be possible to cobble together enough information to get a decent idea of outcomes, it’s certainly not easy.
A ratings system which makes outcomes more transparent would help students make far more informed decisions about incurring loans. It would be particularly helpful to develop something parallel to the Truth-in-Lending disclosure (a statement about the total costs of a mortgage loan) for student loans which can be easily aligned with expected future earnings for the specific degree program and university the student is considering. Such a plain and simple explanation might help young people (most of whom have very little experience with debt, budgeting, and other financial topics) make far better decisions.
Anyone considering college should look at potential jobs and income upon graduation. This is especially true for those taking out loans to pay for their schooling. Some degrees involve starting salaries that are multiples of typical results in other fields of study, even when they are from the same university. Obviously, money isn’t the only driver and not all students are well suited to all degrees. Even so, taking out a loan to pursue a major where future salaries will not be high enough to repay it is a recipe for personal financial disaster. Helping students and their families make financially sound decisions regarding loans is an essential element of dealing with the student debt problem.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.