Some truths are almost unpalatable for their bitterness. For far too many Americans, a college degree has not put them on the road to riches. Perversely, it has weighed them down in a bog of debt. Unlike car loans, which are attached to property, student loans are tethered to the person. Unlike credit card debts, which can be written off in bankruptcy, student loans are almost impossible to erase. Neither disability nor poverty stays that bill collector’s hand. A college education is touted as the passport to the American Dream. For the many Americans who are saddled with student debts that persist unto death, that dream has turned into a nightmare.
The facts are clear enough. Total student debt has tripled over the last decade, exceeding a trillion dollars as of 2014. About 40 million Americans now carry educational debt, which, excluding home mortgages, is the largest component of household indebtedness. Nationwide, both the number of borrowers and the average amount they borrow have mushroomed. In fact, the number of Americans burdened by loans for education has increased in every age group, as has the average debt and the number of people who cannot make their payments. Some 11 million Americans are weighed down by student debt exceeding $25,000, and close to 7 million cannot afford to make their payments. At Penn State, in 2012, three out of every four students graduated carrying some student debt—$35,000 on average. If these numbers seem abstract and unreal, they underlie the grotesque necessity that has driven Penn State students to start the Lion Pantry, a food bank to help fellow students who cannot afford to eat.
Student debt is the consequence of the relation between two factors: the high tuition costs borne by students, and their inability to pay off the loans taken out to cover those costs. These are two jaws of a trap that when shut captures a student in debt. The authors crisply summarize the reasons why the cost of education borne by students has increased so dramatically and why their ability to repay these loans has weakened so drastically.
Students bear an increasing share of tuition costs for many reasons. However, the authors identify the availability of student loans as the catalyst for both increasing tuition costs and the share of those costs placed on students. In the post-war years, higher education was encouraged as the civilian arm of war, and the first federal student loan program, which began in 1958, was fittingly called the National Defense Student Loan Program. Based on the assumption that the cost of education would remain relatively stable, it was thought that student loans would help more Americans attend college. Paradoxically, the open spigot of student loans increased the size of the tub to be filled. Universities, both not-for-profit and profit-seeking, began increasing tuition costs. The cost of attending college has risen dramatically in recent decades at a rate exceeded perhaps only by that of healthcare costs. Universities taking advantage of the ample supply of student loans have primarily fueled this explosive growth. Moreover, access to student loans has also allowed states to reduce their financial support for institutions of higher learning. Thus, student loans did get more Americans to college—but only at the price of unprecedented debt.
Yet, students who took on such large loans would not be trapped in debt if they were earning enough income to pay them off. It is this aspect of the findings reported in this essay that shocked me. I had naively assumed, as many do, that a college education is a passport to economic well-being. However, for many, it may be an extremely unwise investment—an invitation to indigence.
Much is made of the fact that college graduates’ lifetime earnings exceed those of people with only a high-school diploma. This so-called college wage premium, which by some measures exceeds 50% on average, has been widely touted as the reason to encourage all Americans to attend college. But as with all such numbers, much is cloaked by this statistical average. For more than a decade now, the earnings of both men and women with college degrees have actually decreased. Consequently, college graduates earn more than high school graduates do because the latter’s wages have fallen even more than those of the former. Perhaps the college premium should be renamed the “high-school discount.”
Moreover, not everyone who attends college graduates. For the nearly 45% of those who start college but drop out—for mostly financial reasons—there is not much of a wage premium. In fact, over the last decade, more than a third of college dropouts earned less than the median income of high-school graduates. Even for those who do obtain a college degree, their choice of major and of school markedly affects their income. For instance, a student majoring in accounting at Penn State can expect to earn significantly more than a student majoring in education from the University of Phoenix.
More disturbing still is the extent of underemployment among college graduates. As the number of college graduates in the labor pool disproportionately increases relative to the number of jobs that require a college degree, many college-educated adults find themselves underemployed. In 2010, almost half of the some 42 million working college graduates in the US had jobs that did not require a college degree. Perhaps as a consequence of being underemployed, a fifth of male college graduates earned less in 2011 than the median earnings of their counterparts with a high-school diploma only. Female college graduates were a bit better paid than their high school counterparts, but not by much. Long-term trends suggest that almost a third of all college graduates will remain underemployed. Indeed, the expected mismatch in the coming decade between the number of college graduates and the available jobs needing their knowledge and skills is worrisomely large. In the period of 2012–2022, about 19 million new college graduates will have to compete for 3 million new jobs requiring a college degree. Already, there are more unemployed job seekers than job openings in almost every occupational category, and low-paying low-skilled work is the fastest-growing source of employment for youth. Many sober observers of the US labor market fear that recent trends portend a population permanently unemployed and underemployed.
Thus, the two jaws of the debt trap snap shut—and stay shut. On the one hand, all students bear more of the rising per-student tuition fees. On the other hand, many of them face relatively unrewarding job prospects. More and more Americans are herded into college on the promise of upward mobility. But this is a cruel joke for the many millions of college graduates who remain trapped in low-paying jobs while carrying debts that cannot be canceled except in death. For these Americans, the higher education enterprise has become a factory that produces indentured citizens. What’s worse is that the indentured students are blamed for their predicament. Politicians, pundits, and professors hold debt-ridden students responsible for believing what they were told, i.e., that by buying the product called a “college degree” they could partake of a glittering future of highly paid, or at least sufficiently paid, employment. In contrast, the young authors of the essay published here refuse the cruel cynicism of blaming those who have trusted the promises of their betrayers.
The proposal presented here is neither sentimental nor impractical. The authors do not demand that higher education be free for all. Nor do they propose that a version of the Biblical jubilee—the mass expunging of all debts—be applied to student debts. Nor, indeed, do they ask that student loans be treated like all other debts, i.e., extinguished when circumstances force a person into bankruptcy. Instead, they only seek to lessen the burden of student debts. To do so, they consider the three factors driving student debt: the rising cost of tuition, the modes of financing debt, and the employment prospects for college graduates. The authors account for all three factors and the interplay between them. Thus, their proposal advances the discussion beyond many recent proposals, in which only one or another of these three factors is considered.
Their proposal is built on a central insight. They recognize that a student directly consumes perhaps less than 10% of all the resources used to deliver a credit-hour of instruction. When John or Mary eats a hamburger, each consumes this item exclusively. In contrast, when John and Mary sit in the same classroom, they share the services provided by faculty, staff, and facilities. John’s use of the classroom does not prevent Mary from using it too. Some accounting procedure is needed to distribute the faculty, staff, and facility costs to determine the individual cost of educating Mary and the individual cost of educating John. What appears a simple enough matter nevertheless has important consequences that universities appear to ignore when pricing credit-hours. The standard method of dividing all university costs by the number of credit-hours in order to derive the cost per credit-hour is both simplistic and wrong. Most universities use just such an accounting method in determining tuition fees. They charge the same price per credit-hour, though some do opportunistically find ways to tack a few dollars onto the most popular or lucrative majors. Consider again John who chooses to major in drama and theatre arts. Mary chooses electrical engineering. Each pays the same amount for the college credits they buy, which suggests that the cost of the resources each will consume is the same. But that is surely wrong. Electrical engineering students use expensive lab equipment and are taught by highly paid faculty. Drama students do not need labs or any other kind of comparably expensive facilities, nor are the faculty who teach them paid nearly as much as engineering faculty are. Thus, electrical engineering students consume far more institutional resources than do students studying drama. When each of our two students pays the same for tuition, the student majoring in theatre is effectively subsidizing the electrical engineering student’s education. By implication, it is likely that students majoring in the social sciences and the humanities are subsidizing students majoring in business, engineering, and other technical fields. If graduates in the subsidized major earn more than graduates in the subsidizing major—for example, if electrical engineers earn more than theatre actors—then such circumstances only compound the unwarranted advantages of the subsidy. There are well-known accounting procedures taught at universities across the country that would construct a more accurate assessment of the resources consumed by students according to major. It is ironic that universities do not apply to themselves what they teach others to do.
There is a second aspect to understanding that an overwhelming proportion of the costs of higher education are not spent for specific students or even for a specific major. A significant portion of the total costs of running a university is spent on behalf of all the students, as for example the salary of the university president and the maintenance of general infrastructure. It may seem reasonable to divide such expenses equally among all credit-hours on the assumption that each student accounts for these expenses equally and/or derives equal benefit from them. But it is, in fact, more reasonable to allocate these non-specific shared resources by some measure of the benefits they confer. Allocating such resources in proportion to the income graduates in each major can reasonably be expected to earn takes employers’ offers of wages as a better metric of the value contributed by shared resources to any given student. And, it is here, that Kevin and Eric find the hinge of their argument: They accept that the sole purpose of education is employment; therefore, the benefit of education is best measured by the income earned as a result of that education. That Bill Gates is a college dropout or that Peter Theil of PayPal pays students to drop out of college are exceptions that prove the rule. The vast majority of employers still use degrees to sort and value the human capital they employ. Accordingly, the non-specific resources incurred for the benefit of all students are appropriately allocated to majors in the ratio of the projected earnings of students according to their major. If John, the theatre major, can be expected to earn only half of what Mary, the electrical engineer, is expected to earn, then he should pay only half as much of the president’s salary as Mary does. If such proven accounting procedures were implemented, much-needed light would be shed on the heated debates on the relative economic merits of STEM (Science, Technology, Engineering, and Medicine) majors against, say, humanities or social sciences majors.
Proceeding from their argument that higher education costs be linked to expected earnings, the authors then generalize the point. University managers, they argue, are the proper locus of responsibility for maintaining control over tuition costs. The faculty, and even less the students, have little say in the big decisions—the buildings constructed, the number of personnel hired, the alliances entered into—that decisively influence the cost structure of higher education. It is the university managers, much like corporate executives, who make the strategic decisions that drive the costs of higher education. At least in principle, corporations control costs because they cannot keep increasing the prices of their products and services. But the prestige that comes from purchasing a college degree, the supposed access to employment that purchase allows, and the ready availability of education loans, keep up the steady clamor of students trying to get in through the university gates. Assured of the demand for its services, the higher education industry remorselessly increases the cost of its services. University administrators, these authors argue, must be given reasons to keep costs in check.
Instead of relying on moral suasion or the good will of university managers, the authors argue that tuition costs should be pegged to a given percentage of the employment income a college graduate is expected to earn. For instance, 20% of employment income for 20 years could be established as the economic benefit conferred by a college degree. The precise choice of numbers is a political decision, and the authors’ example is only illustrative of their argument. Nothing in their argument prevents selecting figures such that even investors could get a reasonable rate of return on the loan. All their argument requires is (1) that the total cost to John of his college degree in drama and theatre be the same percentage of his expected income as is the case for Mary, and (2) that the total cost to John of his college degree in drama and theatre not include a subsidy to Mary for hers in electrical engineering. Both would thereby earn what the market deems fit for their particular knowledge and skills and neither would pay a financial penalty for his/her choice of major. University managers would be responsible for controlling costs. When the cost of a major exceeds an appropriate share of the income earned because of it, or includes a subsidy for a different major, university administrators must find ways to rein in costs. It bears repeating that most of the costs of higher education are not controllable by the students though borne by them.
The practical aspects of implementing this proposal are doubtless many. Of course, the devil lies in the details. However, neither institutionalized sloth nor reflexive defense of the status quo ought to prevent its serious consideration. In their simple, though far from simplistic, model, Kevin and Eric show that the difference between the majors with the highest and lowest earnings is significant at more than 300%. Electrical engineers make more than three times what drama and theatre majors earn. Yet, both pay about the same amount for a four-year college degree. Neither logic nor habit can defend the proposition that one person pay the same as another for receiving a third of the service.
Whatever objections may be raised against it, this proposal is unlikely to incite the usual critics. Neither the free-market maven nor the liberal humanist will find much to contest. The proposal exploits the so-called discipline of competitive markets by requiring that tuition costs for college reflect its economic value as measured by employment income. On the other hand, the proposal stipulates that the cost of every major be the same percentage of expected earnings. Therefore, if implemented, the proposal would lower the artificial financial hurdles now imposed on such majors as anthropology and philosophy. Much ink has been spilled in attempts to defend a liberal education on the assumption that it is not economically viable. It may well be discovered that such defensiveness is unneeded once universities correctly measure the relative employment-based costs of majors.
As many youth have painfully learned from the recent presidential elections, the one thing worse than a grim situation is the dashed hope that it can be changed. The debt-ridden experiences of a generation of young and middle-aged Americans have punctured their faith in the American Dream. Should this proposal be implemented, the number of years spent paying student loans—and the number of Americans facing indenture—would drop significantly. A college education could once again open the doors to economic well-being. I am heartened by the brilliant work of these two young scholars because it stirs the red-hot embers of hope.