• Tag Archives debt
  • Don’t Blame Capitalism for Surging Student Debt and High Tuition


    American college graduates are suffering financially under the weight of $1.5 trillion of student loan debt. The bulk of that debt stems from worrisome federal student loan practices and ballooning state tuition costs. Approximately 75 percent of college students attend a state university or college with tuition rates set by legislatures or state institutions. Over 85 percent of student loans are generated under the federal student loan program. In the past three decades, tuition at state colleges has increased by 313 percent.

    Oddly, some seem to blame “capitalism” for the student loan predicament. Ray Dalio, billionaire investor, cited massive student debt loads in a recent article that made the case for reforming capitalism. Presidential Candidate John Hickenlooper penned an op-ed for the Wall Street Journal boldly proclaiming he is running for president to save capitalism. The very first point in his argument is that (public) high school education doesn’t provide adequate training for the modern economy. Anecdotally, we have heard the federal student loan predicament conflated with capitalism.

    The pain of student debt is real. Sadly, there are many adults burdened by thousands of dollars in loan debt. Khalilah Beecham-Watkins, a first-generation college student and young mom, is one of many who feels as if they’re a prisoner to student loan debt. Khalilah has been working to pay down her $80,000 debt while helping her husband tackle his own loan obligations. In an interview last year, she said, “I feel like I’m drowning.”

    As is well-reported, many young adults feel like Khalilah. In the United States, the average student loan debt is more than $37,000. As unsettling as that figure is, some graduates face even higher debt loads. About five percent of degree earners have student loan debt totaling $100,000 or more. Stories like Khalilah’s need to be told so that students don’t flippantly take on crushing debt without recognizing the gravity of such a decision.

    This significant debt load is exacerbated by the fact that many graduates are finding it difficult to find well-paying jobs, which has spiraled into incredibly high rates of loan delinquency: More than one out of every 10 loan recipients is unable to keep up with payments. The Brookings Institute estimates that nearly 40 percent of borrowers will default by 2023. These are sobering statistics, and it’s important that borrowers be fully aware of the risks and benefits associated with debt of all kinds, including student loans.

    Despite the burden that comes with debt, there are undeniable long-term benefits to earning a degree. In our skills-based economy, it is no surprise that a person with a bachelor’s degree will earn significantly more than a person with only a high school diploma. It has been estimated that a bachelor’s degree increases a person’s average lifetime earnings by $2.8 million.

    And the more degrees someone holds, the more their earning potential increases. Studies indicate that earning a graduate degree could triple a person’s expected income. But in the near-term, the financial stress of loan delinquency, deferred consumption, and lower net worth is real.

    While the buck ultimately stops with each of us when it comes to our own financial decisions, the student loan quagmire is chiefly the product of federal policy. Federal laws prohibiting sound commercial lending practices and states setting tuition rates high enough to guarantee they’re able to absorb all the federal money they can are complicit in this widespread problem.

    Rather than addressing the underlying problems of federal financial aid and rising public college tuition, politicians like Senators Elizabeth Warren or Bernie Sanders are offering politically expedient ideas. Sen. Warren proposes debt cancellation of up to $50,000 to more than 42 million people.

    Sen. Warren’s plan would eliminate debt for 75% of borrowers with student loans, and federal funding to ensure students attend state college for free. But nothing in life is free. Warren’s sleight-of-hand doesn’t make existing debt or future tuition magically disappear. Rather those costs are passed on to taxpayers. And since college graduates earn roughly twice as much as high school graduates and can expect to be in higher tax brackets, guess who would be paying the taxes for Sen. Warren’s plan.

    To understand the federal student loan mess, it is necessary to understand some details about the loans that are at the center of the issue. The federal government provides a few types of loans, but the largest share of student debt comes from subsidized and unsubsidized federal loans.

    In the case of a subsidized loan, the Department of Education pays the interest on the loan while the student is in school and for six months thereafter. A student can qualify for this type of loan whether or not they are creditworthy or have the ability to repay the loan.

    In typical commercial lending, a bank would not offer a loan to an individual who didn’t hold a reasonable promise of being able and willing to repay it. This harkens back to 2008 when the US housing market collapsed because of irresponsible lending practices and the belief that everyone—no matter their financial situation—should own a home. It should be no surprise, then, that some economists predict a similar implosion of the student loan market. In other contexts, this would be called predatory lending.

    The second contributor to these financial aid troubles is ballooning state college tuition rates. State legislatures and state institutions set public college rates, so these state officials should be held accountable to provide lower-cost alternatives. One lower-cost alternative to traditional on-campus programs would be to offer a basic skills-based college curriculum online at-cost, i.e., based on the marginal cost of providing downloadable lecture videos and similar programming.

    While the total cost to a student of an online degree currently tends to be less than a traditional degree, the tuition is often the same. By offering video of select classes, schools could unlock the value of their existing educational resources and expand access to more students. However, state schools are largely immune from market discipline, which encourages cost-cutting and leveraging economies of scale. Instead of reducing operating costs and tuition prices, state schools soak up the flow of federal loan dollars.

    On the finance side, state universities could offer their own alternative to federal student loans. Take, for instance, the market-oriented model of Purdue University and offer income sharing agreements (ISAs). Income sharing agreements allow consumers to pay off a debt by sharing a portion of the student’s income with the lender for a set number of years. Instead of a loan, ISAs allow investors to take “equity” in a student’s future earnings for a period of time.

    The problem with the financial aid predicament is that market discipline has been eliminated from state college education and federal financial aid. Public colleges aren’t going to be privatized and run like for-profit businesses any time soon. However, by applying market-based innovations and lessons from the private sector to state colleges, it may be possible to expand access to state college, offer alternative financing arrangements (like income sharing agreements), and reduce the cost of college through technology and economies of scale.

    Doug McCullough

    Doug McCullough is Director of Lone Star Policy Institute.

    This article was originally published on FEE.org. Read the original article.



  • Economist: Elizabeth Warren’s Plan to Eliminate Student Debt Is Worse Than You Think

    “There ain’t no such thing as [a] free lunch” –from the El Paso Herald-Post, June 27, 1938

    Presidential candidates and campaigns have been offering “a chicken in every pot” for at least 90 years now, but this election cycle seems to be all about offering more “free” stuff than the other candidates. Some have even gone so far as to claim it’s not a problem that the government prints money to cover such things, as if the concept of Modern Monetary Theory (MMT, or, more accurately, Mindless Magical Thinking) makes it okay. This is beyond the scope of this discussion but is more than adequately covered here, here, here, here, here, and here.

    One point relevant to this discussion is that MMT is based on the premise that government can allocate resources more efficiently than the alternative had their exercise of monopoly power over the currency not taken place—a premise without a single example in all of human history.

    The latest salvo in the Free Stuff Wars comes from Elizabeth Warren and her plan to cancel (most) student loans and offer free college to everyone. Some have even suggested, most notably the Levy Institute at Bard College (affiliated with self-described socialist Joseph Stiglitz), that such a plan would “super-charge the economy.” The premise, as we shall see, is absurd on its face. Surely, this is an effective way to woo millennials with college debt. As George Bernard Shaw noted, “A government which robs Peter to pay Paul can always count on the support of Paul,” but that hardly makes it a sound idea economically.

    There are a number of reasons college debt has ballooned, and understanding them is key to determining how best to address the “problem.” The realities haven’t changed since Thomas Sowell wrote on these topics more than a decade ago.

    First, there’s simply supply and demand. According to the National Center for Education Statistics, enrollment in all Title IV institutions, while down somewhat in the post-recession period (attributed to lower birth rates), is still up 36.3 percent from 1995 levels. Over the same period, the percentage of the population with a college degree has risen from 20.2 percent for women and 26 percent for men to 35.3 percent for women and 34.6 percent for men.

    Today, nearly 70 percent of recent high school graduates are enrolled in college. Unsurprisingly, tuition and fees have skyrocketed. The powers that be have responded by throwing ever more money at the problem.

    Unfortunately, that has only made the problem worse. As economists David Lucca, Taylor Nadauld, and Karen Shen found, roughly 60 cents of every dollar in federal credit expansion for tuition goes only to increasing tuition. No wonder spending on higher education in the US already exceeds that of many countries with supposedly “free” college. An earlier study found that

    changes to the Federal Student Loan Program (FSLP) … alone generate[d] a 102% tuition increase” between 1987 and 2010, “which more than accounts for the 78% increase seen in the data.

    In addition, there are already no less than 13 student loan forgiveness programs already in effect, most of which require nominal payments for 10 to 20 years before any balance is forgiven (a major disincentive to balance reduction). The New York Times recently provided a perfect example, citing the case of Samantha and Justin Morgan, who are on an “income-based” repayment plan and will see their loan balance continually rise until the balance is ultimately forgiven. You can’t significantly increase loan outlays, implement policies that hinder repayment, and then honestly act surprised that balances soar.

    Elizabeth Warren’s plan has been fairly described as a “bailout for the elite,” as the top 25 percent of households by income hold almost half of all student debt and as the cost would fall on all taxpayers when about two-thirds of American adults have no college degree, not to mention the 3-in-10 students who leave college debt-free (if you planned ahead or stepped up and paid your debt off, this scheme is a slap in the face).

    But, as the Lucca-Nadlaud-Shen study makes clear, the real beneficiaries are the educational institutions that enjoy the benefit of more money being added to the system without a change in supply.

    Cost: As with health care, and as we’ve already seen with tuition, you never really see just how expensive something can be until it’s “free.” The initial cost of debt cancellation, as Warren herself points out, is $640 billion. Then, of course, she suggests that the tab to taxpayers for “free” college will be $1.25 trillion over the next 10 years. Even that staggering figure, however, does not take into account what we already know happens when federal money is funneled toward tuition.

    If the 60 cents on the dollar figure holds—and there’s no reason to suspect otherwise—it would take $2.08 trillion just to meet the students Warren has taken into account. And then there’s the demand side of the equation. Of the 30 percent of high school graduates not enrolling in college under current conditions, how many does one suppose would enroll when college is “free”?

    This conundrum inevitably leads to rationing. As Ryan McMaken notes, “In the real world, no scarce resource can be both open to all, and also very inexpensive.” This explains why countries with “free tuition” often have a lower—often materially lower—percentage of college graduates.

    Quality: It’s difficult to argue that the highest quality higher education in the world is in the United States due to accident rather than due to the retention of economic incentives. The elimination of those incentives can hardly have anything but a material detrimental effect on the quality of education provided. The experience in England until the late 1990s is particularly relevant.

    Free college caused “quality to decline and socioeconomic inequality to rise.” As noted by Preston Cooper in Forbes,

    England’s experience highlights a fundamental problem with a government role in higher education: If universities rely more on government than students for funding, the level of investment in higher education hinges on the whims of politicians rather than the needs of students.

    All of the claims of economic benefit from both the elimination of student loan debt and the offering of “free” college boil down to the assumption that resources would be better allocated if only students didn’t have this debt to service. They point, for example, to lower rates of home ownership among those under 30 (conveniently glossing over the fact that the same falloff was seen for both those with no college and those graduates with no college debt), but even there, the evidence is mixed.

    While the consensus is that “American youth hav[e] accommodated tuition shocks not by forgoing schooling, but instead by amassing more debt,” perhaps explaining the “decline in homeownership for 28-to-30-year-olds over 2007-15,” the fundamental point missed by those favoring debt forgiveness is simple choice.

    Those incurring student debt did not have it imposed upon them. Rather, debt was incurred because the borrower determined that it was in their interests to incur that debt in order to obtain the benefits of higher education. They did so knowing it would mean that those resources would not be available to spend on other things.

    Certainly, sometimes those decisions were in error, but, particularly for those not majoring in ethnic studies, fine arts, or philosophy, by and large, the benefits of taking on that debt to obtain a higher education still materially outweigh the costs. As one economist noted in 2014,

    The typical student holds debt that is well below the lifetime benefits of a college education. The typical student borrower is not “under water,” as were many homeowners during the mortgage crisis.

    From an economic perspective, there is no reason to second-guess the decision-making process of those who benefit most from the educational services being purchased and, in order for there to be a real economic benefit from expending taxpayer resources to allow those borrowers to expend resources elsewhere, it would have to be demonstrated that those decisions, overall, were wrong in the first place.

    William E. Fleischmann

    William E. Fleischmann is an economist and financial professional with more than thirty years of experience in banking, insurance, and healthcare. Bill has a passion for economic history and, in particular, the extensive harm done by minimum wage laws.

    This article was originally published on FEE.org. Read the original article.

  • The National Debt is the Most Serious Crisis America Faces

    A generation ago, the national debt stood at just a smidgen over USD $4 trillion and a young presidential candidate named Bill Clinton was discussing a great plan he had to have it entirely paid off by now. Oops. The national debt is now 5.5 times bigger.

    More than anything, this astoundingly bad public policy is the fault of Barack Obama, undoubtedly the most irresponsible president in our history…who added on more to the national debt than all other presidents combined in an orgy of Washington, DC, debauchery that saw the size of the federal government mushroom while hundreds of thousands of new bureaucrats were added to federal payrolls, and Washington, DC, housing prices skyrocketed as federal government employees and private industry sub-contractors paid for by the government reveled in their six-figure paychecks and outrageously lavish healthcare and pension plans… all paid for by us, the taxpayers.

    Obama’s stewardship of our national finances was truly obscene, but George W. Bush was nearly as bad. He has even less of an excuse, in fact, because he had a Republican Congress to work with for most of his eight years. During that time, Bush took us from USD $5.8 trillion to USD $10 trillion, something that seemed reckless at the time. Of course, in light of the Obama USD $10 trillion spending extravaganza, Bush looks prudent by comparison.

    people with law and medical degrees and MBAs from Ivy League universities, people that come from the finest law practices and accounting firms and consultancies and banks and financial institutions in the country…and our end result is the debt avalanche we now have before us?

    Why do we believe politicians of either party when they tell us that they will make our national debt a top priority?

    Why is it that the American people seem to fail to understand how ruinous our national debt truly is and what an astounding percent of our national budget we are now spending on servicing that debt?

    Former Pennsylvania Governor Ed Rendell has penned an op-ed which presents some eye-opening statistics as to just how bad our national debt really is. By next year, the cost of servicing the national debt (paying interest on it), will exceed the cost of Medicare. By 2025, it will exceed the cost of our military spending, making it the most expensive item in our entire national budget!


    Today’s high school and college students are well-versed in a whole host of social justice topics, courtesy of their Marxist professors. How much would you venture to bet that they hear little to nothing about the national debt and what it means for American workers and families?

    Today’s campus culture social justice themes include the “right” to “free” healthcare and education… transgender bathrooms… the need for “safe spaces”… the enforcement of campus “speech codes” designed to make sure that no one ever gets their feelings hurt… a robust and comprehensive policy on identifying and denouncing inappropriate Halloween costumes… and a stale and tired Marxist discourse on the exploitative nature of American capitalism.

    But… when was the last time college students ever got together to protest a USD $22 trillion and rising national debt? Do they understand the threat, even?

    And even more importantly… do they understand why and how we have gotten here?

    Quite simply… we have arrived at this point by spending infinitely more than we collect in tax revenue, mainly on things that have no mention in the Constitution as being a function of the federal government.

    Public sector unions, and the millions of workers and hundreds of millions of dollars that they spend every year to support the Democratic Party, play a fundamental role in not only our ruinous levels of federal debt but the debt crisis facing our state and local governments as well.

    Nothing is more ruinous to our future than the ever-increasing demands of government employees… specifically public sector union employees such as those at AFSCME and the SEIU. They live like kings and queens on the backs of actual working class people… all the while donating hundreds of millions of dollars to the Democratic Party to ensure that their six- and seven-figure paychecks never run dry.

    They couldn’t care less about government budgets or the national debt or actual working-class people. They couldn’t care less about “public service.” There are only two things that public sector unions care about: soaking the rest of us for the biggest paychecks possible… and shoveling money to socialist politicians like Bernie Sanders and Elizabeth Warren.

    But it is not merely their salaries and the fact that government employees rarely, if ever, get fired. It’s the highly lucrative nature of their healthcare and pension plans… plans to which they contribute far less than their private sector counterparts.

    For states, these plans have proved a bitter pill to swallow, and have led to the greatest fiscal crisis in the United States that you have most likely never heard about: unfunded pension liabilities. When you drill down into the details, it is almost impossible to believe that the situation is true. Essentially, states promise outrageously generous pensions to state employees (who, of course, rally to support whichever candidate promises them the most money), and then fail to fund those very plans… kicking the can down the road to future administrations and generations.

    Now, it amounts to a USD $6 trillion crisis.

    For the libertarian and conservative movements, it’s time to stand for fiscal responsibility and common sense. It’s time to stand against government employees and their demands, and explain to the American people that the government is spending their money on entirely unconstitutional (read: illegal) things. It’s time to take a strong stand against the public sector unions like AFSCME and the SEIU that are leading this country to fiscal ruin.

    And more than anything, it’s time to force Trump to actually live up to his promise of draining the swamp: reigning in the excess and beginning to drastically reduce the size of our bureaucratic state: firing large numbers of government employees.

    These government employees are driven by self-interest.

    It is hard to envision government employees stepping back from the situation and saying:

    Well, I have a pretty generous salary, healthcare, and pension. It’s far more generous than the private sector enjoys. And we are $22 trillion in debt, and the government is spending too much money. So… as much as it pains me to say… me and some other government employees should lose our jobs. The government is spending too much money, deficits and debt are growing, and I should go look for a job in the private sector.

    That is never going to happen. Public sector unions are a millstone around our neck, and as many commentators have noted, they have no natural enemies.

    Except, of course, for citizen watchdog groups and independent media outlets who are not afraid to denounce them and point out their ruinous nature.

    I, for one, will not rest until we return our government to the vision of the Founding Fathers, who would not have approved of any of this. Let’s start by ending the Department of Education, the Department of Housing and Urban Development, the Department of Energy, and the Department of Agriculture. That would be a good start. We could use the money we saved to begin paying off our national debt, and government employees would have to do something that the vast majority of real working class people have to do every day: compete in a highly competitive free market economy to earn our daily bread.

    This article is reprinted with permission from Panam Post. 

    David Unsworth

    David Unsworth is a Boston native. He received degrees in History and Political Science from Washington University in St. Louis and subsequently spent five years working in real estate development in New York City.

    This article was originally published on FEE.org. Read the original article.