Ideas on Fixing the Student Loan Mess

August signals another return of many back to the halls of higher education.  It has also been that way in our household, as we currently have three currently in classes for a bachelor’s degree and beyond currently.  Thankfully, we have one who graduated with his bachelors this summer.

Higher education has become ingrained in our culture as a necessity to achieve in life.  Statistics shows us that on average those with a bachelor’s degree will earn more than those with a high school diploma, those with is masters earn more than a bachelor’s, and so on.  So, we push those in our society to seek more education to achieve more in life.

The only problem with this is that it costs money to do so.  Lots of money.  This is met with sacrifice in the family to pay for the education and when there is not enough savings to do so, it requires student and parent loans.  Personally, I think this is a factor that hits the middle class, those who make too much money for the student to qualify for grants and needs based scholarships but do not make enough to outright write a check for college.

The Federal Reserve Bank of New York now states that student loan debt has surpassed consumer debt in our country.  It was the only form of consumer debt that has grown significantly since the crash in ’08.  Americans owe $1.4 trillion in student loan debt; $620 billion more than credit card debt.  The average graduate in 2017 will have $37,172 in student loan debt to pay.  This number is up 6% from last year.  The repayment on these debts is a problem.  The average 90-day delinquency rates among the different age groups ranged from 8 to 16% in 2012.  The Fed also believes this rate is understated as much of the loans are in deferral.  Now as a lender, I know that to be successful, I need to be right 99 1/2 % of the time.  With such a high percent as a problem student loans, it seems this lending is very risky.

So how did we get here?  There are several factors.  First, college costs seem to have consistently risen faster than overall inflation and real wages.  So, if someone is going to college, they must borrow more today than they would in the past, since family wages are not keeping up with tuition increases.  In society, there seems to be little to allow for market forces to begin to check the rapid growth of tuition. 

This seems to have accelerated since 2010 when the Federal Government took over the student loan program, which for 45 years had been run in the private sector with government guarantees.  Couple this with additional governmental spending on education and we have large sums of money that are thrown at the feet of institutions.  Education costs are pushed up and those in the middle class suffer the most. 

So, what are some solutions to the problem?  One is we need to embrace the fact that we need people in our country who enter the workforce without any sort of higher education.  Skilled trades are sometimes looked down upon by those in the ivory tower of education.  Yet their contribution to the economy and raising a family without a large student loan debt of the primary breadwinner should be celebrated. 

Another possibility is to get the Federal Government out of the direct business of student lending.  Again, we know that a lack of efficiency here will just continue to have student debt grow exponentially.  Perhaps some of this should be taken on by the institutions of higher education themselves.  This could provide ongoing interest income for the institution.  It also ties the college into making sure the graduated student remains successful in their field to better insure the payback of their loans to the school. 

Schools need to become more efficient and governed by the market.  Students should have a rating of different classes and degree programs as how these will translate into projected future income.  If this income is not as great as the required debt to achieve the education, then perhaps a student loan should not be granted.  This is a hard topic to come to grasp with, as everyone will have different value of different fields of education.  But, simply if you want to have people pay back their student loans, they need to be in a field that provides enough income to do so.  This may help eliminate classes and courses of study that do not seem to directly benefit the student economically from the ability to have said class paid with a student loan.

Every college should provide a required course of study in personal finance and the relation of student loans to budgets, future income, and savings.  This should start early in college to help the student make decisions on fields of study.

Many universities are beginning to embrace various distance learning models that allow for the students to attend class and save money on room and board costs that would be found in a traditional college setting.  This also may allow students to continue to work in their present job while using spare time for classes.  This model of education should be able to be delivered at a lower cost than traditional class settings.  Everyone in my family has used distance learning for a portion or for all a degree program.

Innovative ways to pay for college should be explored by institutions.  At College of the Ozarks in Branson, Missouri, students work one of hundreds of jobs on campus to help pay for their education.  Classes and campus jobs are scheduled to avoid conflicts.  The school also operates with less employee costs as it gets much of the labor from the students.  This work, in combination with scholarships has students graduating with no student loan debt.  The college has a 64% graduation rate and students who enter the workforce at the national average for wages.  Again, all this is completed with no federal student loan debt at “Hard Work U” and the college ranks high among several independent university rankings and as a great place to work.