September 21, 2010

ANDREW GILLEN: THE AMAZING COLLEGE DEBT BUBBLE.

This heavy debt load is causing much suffering, and whenever there is suffering, it is tempting to blame it on some easily vilified scapegoat. The for-profits seem to be serving that function these days, and while they are by no means blameless, there is plenty of blame to spread around.

First up are students and parents. While earlier generations that paid only a few hundred dollars a semester can perhaps be forgiven for continuing to believe that college is a nearly risk-free decision financially, today’s students do not have that luxury. Exploding tuition and the related horror stories about crushing debt loads appear regularly in the media. Yet students and parents largely ignore these warnings. The views that more (formal) education is almost always a good thing and that the loans needed to finance it are “good debt” since it is an investment are both widespread and contribute to the problem. While true to an extent, these views can be and are being carried too far by some, blinding some individuals to the dangers of debt.

The government also shares blame for the high debt load. Part of the problem is that the government seems to be encouraging too many students with little prospect of graduating to borrow money to attend college. . . . But by far the largest share of blame for the tsunami of debt falls on the colleges themselves. As Robert Martin argues, “higher education finance is a black hole that cannot be filled.” Colleges have nonetheless attempted to fill the hole with student borrowing. Such greed, when filtered through a well-functioning market, need not be a cause for concern as the market channels it into useful and productive activities. Unfortunately, the higher education sector cannot be characterized as a well functioning market. The lack of adequate measures of outputs or outcomes is primarily responsible for this, but there are other contributing factors including the non-profit or public status of most institutions, the principal agent problem, and peer effects.

Read the whole thing.

UPDATE: Reader Scot Echols writes:

I know I’ve been pestering you a lot lately Glenn, but as one of those with crushing educational debt, I have to weigh in here.

It speaks to the general branding of the value of a college education that, unlike almost any other expense, people don’t even seem to question the benefits of getting a college education, regardless of the cost, over other options. I realized in my first failed attempt at grad school that all one had to do was show u p, and the school would figure out how to keep you there. I saw some hint of that at the undergrad level, but it was glaringly obvious at the grad level. If you meet the minimum requirements for their program, ESPECIALLY if you are a minority or female student, they are going to move heaven and earth to get you funding. But this is a Faustian deal if there ever was one. If one had the knowledge to do a financial projection of the long-term value of a college education, trade school, workforce, or military options start looking really good. My oldest son enlisted in the Marines, and now, at 25 years old, he owns a house, has about 40K invested into two classic Dodge Chargers almost completely restored, has tens of thousands in retirement and other savings, and a gun collection that would be the envy of many life-long collectors. Now they are PAYING HIM to get a degree! He will retire a millionaire without breaking a sweat because he chose to enlist FIRST rather than going straight to college. Going into debt to get a degree is just plain wrong, and the people who push the debt are worse than credit card companies in taking advantage of their customers.

I agree that debt for a generic college degree is a big mistake.

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