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Student Debt Crisis
Grad Degrees Drive Student Debt Disaster

Outstanding student loan debt now stands at around $1.2 trillion, and recent data suggests that graduates are increasingly falling behind on their payments. Yields on government-backed student loan bonds are rising relative to the LIBOR benchmark, highlighting rising worries among traditionally risk-averse investors about a sector of the market usually viewed as a safe bet. Moody’s is reevaluating its criteria for assessing the riskiness of securitized student debt, according to the Financial Times. A serious downgrade by Moody’s—which is scheduled to release the new criteria by Labor Day—could send the student debt market further off the cliff.

How did we get into this mess? The Wall Street Journal describes the outsized role played by overpriced graduate degrees, and the generous federal loan programs that prop up their sky-high tuition:

The doubling of student debt since the recession, to $1.19 trillion, has stoked a national discussion over how to rein in college costs and debt and is becoming a major issue in the 2016 presidential race. Little noted in the outcry is the disproportionate role played by postgraduate borrowers, who now account for roughly 40% of all student debt but represent just 14% of students in higher education.

Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven. Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.

The data supports, among other things, the lawyer glut narrative we have been following for the last few years; the WSJ reports that debt growth has been most severe among law-school graduates. This is not surprising. Many law students took out massive loans when the JD was still viewed as an automatic ticket to an upper-middle class lifestyle. Thanks to the lawyer surplus and new technological innovations, this is no longer the case, and cash-strapped JDs are struggling to make good on the loans they took out when their degree looked like it would be much more lucrative.

But the problem extends beyond law school. As credential inflation proceeded apace, the number of students earning expensive master’s degrees swelled over the last few decades. Medical school debt has also soared, though doctors are often better-situated to pay it back than other graduate degree-holding professionals.

The student loan crisis obviously poses the most acute problem for graduates, but it could soon become a problem for taxpayers in general. As John Dizard has noted, the federal government guarantees hundreds of billions of dollars of privately funded loans, an amount “on the same order as Greece’s debt to multilateral institutions.” Many of these loans are in income-based repayment programs, where students pay back a percentage of their income for a certain number of years, and the public is on the hook for the remaining balance.

How the U.S. addresses its student loan crisis will be one of the major fiscal questions of the next decade. Reforming overpriced graduate programs has to be part of the answer.

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  • Andrew Allison

    The only way the graduate scam will be reformed is to cut of the flow of money. Shouldn’t the first step be to put an end to loan forgiveness except under exceptional circumstances? Many of the post-graduate students acknowledge that they are pursuing their studies in the expectation that they won’t repay the loans required to do so.

    • f1b0nacc1

      The best way to deal with the problem is to stop loaning tens of thousands of dollars to individuals in their early 20s with no discernible assets. They have no ‘skin in the game’ and are thus not behaving as part of any sort of rational market.

      • GS

        The best way to deal with the problem is to drastically increase the meritocratic aspect of the students’ admission and retention, taking the cue from the [tuition-free] military services’ academies. Increase that aspect to the exclusion of everything else. Cast not your pearls [in this case, idukashian] before the swine. The better grade of students [and by that I mean the better grade cognitively – those with 2300+ on combined SATS, and not the SES background, or alumni progeny, or brainless athletes] would not tend to have any difficulty with loan repayment – nor would they be crowding into the PC-tarded fields.

        • f1b0nacc1

          None of which is wrong, per se, but the real problem is that we are wasting resources trying to get ‘everyone’ into college, and then organizing our society around that goal. When you have 1-2% of the population in college (which is really what that model is geared towards), with a focus on academics, not job preparation or social signaling, then the system works. Academe shouldn’t be about social engineering, or even education as such (we should be providing education at the primary and secondary levels, which we do not), but a deeper search for knowledge.

          • GS

            Actually, Charles Murray discussed it in his book “Real Education”. The college education, as traditionally understood [imparting and developing the cognitive skills at the level above that attainable for the majority of population] has the IQ floor ca. 115, graduate education a tad higher, ca. 125. Which means that about 16% of the age cohort belong in college, and about 3.5% in the graduate schools. This is the maximum which could be properly herded there. This is diamerically opposite to the “college for everyone” slogan. Cast not your pearls before swine.
            Nobody speaks of every [at least, male] youth being the Special Forces material, even potentially – the SF similarly take the right shoulder of the physical fitness Bell Curve. With them it is not controversial – some can be trained into the SEALs, and most of the others [like yours truly] cannot be forced to meet these requirements, even at a gunpoint. And nobody speaks of the SEALS training in the civil rights context. One does have the right to apply, but that’s all. There is no right to be accepted into the BUD/S, or to graduate from there. Similarly, some could meet a serious college [say, MIT is a good example] requirements, and the others cannot, no matter the amount of birch [birch is the Tree of Education] used/wasted on them. And the only colleges we need are the serious colleges. An Outhouse University does not deserve to exist.

          • f1b0nacc1

            We agree for the most part, but I should point out that there are plenty of feminists who DO point out that joining Special Forces is a civil rights issue. I do note that you limit your comment to males, but if we have idiots arguing that dimwits should be university students, why not women in the Special Forces?

          • GS

            There was an isomorph of Dorothy Parker – a renowned feminine wit, but that particular one wit was an actress and not a writer by profession – Rina Zelenaya. One of her bon mots was that feminism and related activities usually occur from under-effing.
            As for the females in SF – a female sufficiently far to the right on the physical fitness bell curve [think female Olympic athletes] could qualify – why not? But just like with the males, it is not a “right”. One has the right to apply, but the “rights” end right there.

    • rheddles

      The best way to fix the problems in Health care, education and housing is to get the government to stop distorting the market by subsidies to voters.

  • iconoclast

    Since much of the increase in cost went to university feather-bedding of worthless administrators maybe lenders should resort to recourse from university endowments for partial payment of non-performing student loans.

  • Greg Olsen

    Some of the responsibility rests with the students. For example, there are perfectly good bargains in master’s degrees available at state schools in the Midwest and South. I did a lot of comparison shopping for MBA programs and found an absolute bargain at University of Nebraska-Lincoln relative to say a comparable school in terms of reputation like University of California-Davis (Auburn was another option in a similar price range). It was 1/3 the cost. Ditto for a program I am in now in International Relations. There is a 3-5x difference in comparable programs, so comparison shopping is really important.

    Credential inflation is a fact of life in the job market today. I got my MBA because it is required to get through the computerized resume screens (although the degree has paid for itself in the investment performance in my retirement accounts because I apply modern portfolio theory I learned in business school), not because I really needed it, with 17 years of work experience. The genie of credential inflation cannot be put back in the bottle.

    • FriendlyGoat

      Your last sentence is absolutely and obviously true, but we don’t adequately think about it or confront the problem until someone expresses it clearly—-as you just did. We might want to “go back” to less credential imperatives, but no one can figure out how to do that, or even start.

      • Greg Olsen

        I did not address it, but the master’s degrees do have a very useful function as well, which is the starting point for a career change. I am in IR now, because I am hoping to make a mid-life career change. Thanks to a WRM’s colleague, Charles Hill, I ended up getting widely read in IR, but needed to get credentialed too. Here again, I needed to get through the resume screen. The particular IR program I am in has been really good, because it is policy-relevant, focusing on realism and neoliberal institutionalism as the primary theoretical approaches.

        • FriendlyGoat

          In your new chosen field, there is probably no choice. What we hear of people flunking a resume screen without an MBA or other master’s in other fields though is unfortunate. The “screen” requires the degree when the job may very well not.

    • Kevin

      Let’s apply Gregg vs. Duke Power to degrees rather than intelligence. No more allowing allowing employers (and government employers are the worst at this) to use degrees as a signaling mechanism. If they want someone with a given skill let them test directly for the knowledge or ability rather than the tremendously inefficient process of using where you went to school to serve as a proxy for the skill they are looking for.

      • f1b0nacc1

        Griggs vs Duke.
        Otherwise, I am absolutely in agreement with you. Eliminate that single ruling, and a huge amount of the credentials genie gets shoved back in the bottle quite quickly.

  • Fat_Man

    There are no bargains in medical schools, and the US does not graduate enough doctors to
    fill all the available residencies, let alone enough to maintain a
    sufficient doctor/population ratio. If you stick medical students on
    tuition and loan repayments you will force them to avoid less
    remunerative specialties like pediatrics and family practice. You cannot
    repay $400,000 of loans and raise a family on a pediatricians salary.

  • Jacksonian_Libertarian

    The only way to regain the “Supply and Demand” balance in education is to get the meddling Big Government Monopoly out of education. It doesn’t have Constitutional authority over education in any case, as no where in the Constitution is education even mentioned or enumerated. And according to the 9th and 10th Amendments, authorities not specifically given to the Federal Government, were retained by the States or the People.

  • Episteme

    In the debates over student loans, I don’t know whether I’m clever or a sucker to do what I’m doing – slowing paying my own way through a graduate program at night one class at a time (taking a semester or more off as needed to earn more savings), figuring that what it costs me now at least doesn’t have interest involved like paying back loans would. Of course, I’m in a humanities field that pays less than rubbish, so I’d end up too deep in the hole to dig out if I indentured myself to the government bank; better to live as if under a vow of poverty. I’m not certain what the institutional answer is, but it seems that too many are counting on students to keep over-loading the system until it’s either (A) too big to fail and everyone needs to be bailed out, or else (B) the overload crashes down around them and it takes down that system regardless of how many young people go bankrupt with it. It’s odd to me to see how many folks that I know complain about loan rates (and even how they can’t afford to go back to school because they’re paying off loans from previous poorly-considered ventures that haven’t gotten them jobs) as if that’s the only way to pay for education.

    We have huge issues with over-certification requirements; we likewise have problems where older workers not leaving the job markets has backlogged opportunities for entry-level jobs, so the young are queued into higher-education to mask a potential European-level unemployment crisis (similarly we have folks with multiple degrees getting unpaid internships where people 10-15 years younger a generation ago were getting well-paid starting jobs – with that backlog up top, those same people from last generation may well still be in those same starting jobs with just new titles to hide their lack of advancement!). It’s a multi-tiered issue where the student loan crisis is just the most visible portion – as noted, there’s also matters within universities, where the rising costs are directed all into administration, so you have just huge numbers of underpaid adjuncts teaching overcharged students…

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