The Truth About the Student Loan Crisis
2021-04-09 · Guest: Preston Cooper (Foundation for Research on Equal Opportunity) · 52:59
The Economics of the Student Loan Crisis
Bob Zadek and Preston Cooper discuss the nuances of the student loan “crisis,” arguing that the real problem lies with low-balance borrowers who didn’t finish their degrees rather than high-earning graduate students. They explore the history of federal involvement in student lending, the resulting tuition inflation, and the flaws in current forgiveness proposals, concluding with a call for institutional accountability and alternative financing models.
Topics: Student Loans, Higher Education Economics, Federal Debt, Tuition Inflation, Income-Driven Repayment, Public Policy
Speakers: Bob Zadek, Preston Cooper
Introduction to the Student Loan Crisis [00:21]
Bob Zadek: Hello everyone, and welcome to The Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. Thank you so much for listening this Sunday morning.
This morning’s show, we are going to do a really deep dive into a subject which, compliments of the recent election, forced its way to the top of the news. It has forced its way to the top of the news because of the overwhelming size of the economic issue which it presents. The subject is student loan debt. How big is the problem? What is the problem? Is there a problem? And if there is a problem—we’ll decide that during the hour—what is the solution?
Man, are those big problems. And the discussion this morning will invite you, will force you, to think about so many core economic, social, and political issues. It’ll probably make your head explode. To help us understand this, I thought we ought to just get the scholar who knows more about higher education economics and student loan debt than perhaps anyone else in the country.
Now, Preston is too modest maybe to concede that is the case. We’re not going to debate that, Preston, but accept me, my friends, accept what I say it is the case. This morning’s guest is Preston Cooper. Preston is a PhD student at GMU, George Mason University, in the economics program and is a visiting fellow at the Foundation for Research on Equal Opportunity. He has studied higher education finance, higher education economics, and the student loan debt more than anybody else. And after this hour, you will understand why. It is a deliciously intellectual exploration into economics, social policy, equality if you will—even though we don’t talk about equality much on this show. There is so much going on. Preston, welcome to the show this morning and thank you so much for all of your scholarship on the subject of the student loan debt.
Preston Cooper: Well, thank you so much, Bob, for having me. And really appreciate that introduction. That’s one of the best I’ve ever gotten.
Identifying the Real Crisis: Dropouts vs. Graduates [02:50]
Bob Zadek: Well, Preston, after the show, everybody, you will be the, if they will, if you will, the talk of the town. So Preston, student loan debt. First question is, is there a crisis? Now, “crisis”—President Biden will not allow anybody in his administration to use the word crisis in discussing the border. I am now using it, the forbidden word. I am now using it to discuss a related issue.
So first, student loan debt. Now, yes, we have students and yes, we have debt. And those same students, they owe money on their car loans. They might be even behind in their rent and owe money there. Grown-ups have lots and lots of debt. Everybody has debt. Debt is a economic tool which, if used correctly, helps you organize your finances. Businesses do it, individuals do it, everybody does it, despite the Shakespeare’s caution, “neither a borrower nor a lender be.” Well, Shakespeare didn’t study econ and he would not forbid people from being either a borrower or a lender.
So since debt is an important part of our life, student debt is only one type of debt. There are a myriad types of debt. So why is student debt special? And tell us the big picture. Why is it an appropriate national discussion now today? What’s the problem, if you will, with student loan debt?
Preston Cooper: Thanks, Bob. So the student loan debt crisis is not what you think it is. So when you pick up the New York Times, you might flip to the opinion section and you’d see a story in there about someone who has $100,000 worth of debt. And that’s what you’ll most commonly hear in the media is that person with six figures of debt. But that is actually the person that we should be the least worried about. Because if you have $100,000 worth of debt, you probably have a graduate degree, probably a law or a medical degree that will enable you to earn six figures a year, probably millions of dollars over the course of your life. You’re going to earn back that $100,000 you paid for the degree many times over.
I would say the real student loan crisis, the people who we really do need to be worried about, are the people with actually less than $10,000 of debt. And those are the people who went to college for one or two semesters, who dropped out, and they have the debt but they don’t have the degree. And we see the statistics show that those people are actually much more likely to fall behind on their loans, to not be able to repay their loans, than the people who do graduate college and who the media wants us to believe are the people who are really having trouble.
The History of Federal Student Lending [04:55]
Bob Zadek: Preston, the fact that somebody borrowed money which didn’t produce the revenue—the expenditure didn’t produce the revenue to pay it back, like borrowing money to buy income-producing assets, for example—they wasted their money. Well, people waste money all the time. People make bad purchasing decisions. They buy cars that are too expensive. They buy cars they shouldn’t be buying. And so many of those very same students owe money on car loans. Why is there not, why are we not talking about a national young person’s car loan that he’s three payments behind in? Why are we not talking about somebody who is three payments behind in their mortgage loan? What’s special? Why does student loan capture the attention of people in Washington and in the media and not other types of debt? Running behind in debt is not a headline-grabbing event. What’s the big deal about student loan debt?
Preston Cooper: Thanks. Well, I think you’re definitely right that the average college graduate, someone with a bachelor’s degree, has about $30,000 in debt, which is about the price of a new car. So it’s not a huge sum. But where federal student loans are different is the fact that the federal government is so deeply involved with this lending market.
In order to understand why the federal government has such a huge role in student lending—they’re about 90% of the new loans, the new student loans come from the federal government now—in order to understand why that happened, you have to go back to, of all things, Sputnik. So the Russians launched a satellite in 1957, the first man-made object in space, made headlines around the world, and it caused this freakout in the United States. And they thought, you know, we are falling behind in the science, technology, and math race with the Soviets. We can’t allow them to beat us. And in order to do that, we need to educate a bunch of new scientists, we need to educate a bunch of new mathematicians. So they created basically a student loan program for national defense.
And it started out small. It was just 40,000 loans in its first year, compared to about 45 million student loan borrowers today, that were dedicated to math and science education. But as we all know, there is nothing so permanent as a temporary government program. And over the years, the government just started expanding the student loan program. The first time came in 1965 when we expanded this from just science and technology education to basically all low-income students could then get a student loan from the federal government. We kept expanding it again in the ’70s and the ’80s and the ’90s. We opened it up to all students. And then flash forward a few decades later, 2021, we have over $100 billion worth of student loans going out the door every single year. We’re going to make $1.2 trillion worth of student loans over the next decade alone. And the program has just slowly grown through these discretionary expansions that happen every five or ten years, has grown into a $1.7 trillion behemoth, all because of Sputnik.
The Lack of Due Diligence in Federal Lending [06:12]
Bob Zadek: And you call these loans—I’m letting you get away with something. In a loan, it’s a temporary renting of money with an obligation on the part of the renter of the money to pay it back. But student loans are half of that. The money goes out, doesn’t quite come back. And so it’s like an optional repayment loan. There’s something short of compulsion. But we may get into that, we may get into the bankruptcy implications if we have time during the show.
So now we have this program with mission creep. And by the way, what was really interesting what you explained to us—remember when the federal government was not involved in highway construction at all? And President Eisenhower, of course, a former military general, with paying attention to defense, initiated the interstate highway system. Why? And students of highway history will know this, but the federal government justified its incursion into highway construction and design because, believe it or not, national defense. We had to get troops in trucks across country in a hurry lest we get invaded from the West Coast, or on the West Coast, and all our troops are on the East Coast going to the theater in New York. So we had to get them to the West Coast in a hurry. We better build a highway system to get the troops in the trucks. It’s that quaint.
But look at the similarity. National defense is the cover, is the political cover for the government to get involved in a new activity. National defense. And once you’re in, you’re in. And then you have mission creep. And now you have Biden providing $400 billion to fix potholes. I’m reminded of a senator from New York, D’Amato was his name, and he was nicknamed “Pothole” because he was a senator from New York who only focused on what potholes in Long Island. But okay, I digress, admittedly.
So now we have the federal government is now in the thick of it, making student loans. And I just want to remind our audience what you said a second ago. When it makes these quote loans, there is no credit check. There’s no discussion about whether this loan makes credit or economic sense. It’s a “anybody who has a pulse gets the money.” And there’s no control over how the money is spent, other than just give it to our democratic constituency, the colleges and universities. So the government gives a 17-year-old high school graduate unlimited money to spend on any program irrespective on whether that program is going to produce revenue and irrespective on whether this 17-year-old is likely to pay it back. Now, how would you do a credit check on a 17-year-old? He has no credit history, never had a job to speak of. So of course, it’s just a gift of money with a vague expectation of getting it back.
Tuition Inflation and Federal Subsidies [08:40]
Bob Zadek: Now, the problem in part has been, as you have explained in your writing, Preston, is so now we have unlimited money to uncreditworthy probably students who can spend it pretty much any way they want in any amount that they want. But they’re going to go to college. So now let’s look at what they are buying. Now, tell me about the cost of tuition. And there is an amazing parallel which you and I will discuss, I think, in a moment, between the ballooning cost of healthcare and the ballooning cost of tuition. But tell us about the cost side of the equation. Because as tuition costs go up, that means the amount of the loan has to go up to keep abreast of it. So tell us how the cost of tuition fits into this conversation.
Preston Cooper: Excellent. Yes. So the number that we all need to know is 80%. That’s how much college costs have gone up over the past two decades after inflation. So after the cost of living increases, the price of tuition has still risen 80%. And ironically, that’s as federal government aid, federal government grant aid and aid from the state governments has also been going up during that time. So basically, taxpayers are running faster just to stay in place when it comes to college costs because we’re putting more and more money into the system, yet the tuition keeps rising more and more. And even though students are getting much more financial aid today than they did 20 years ago, the net price that they’re paying after all that aid is still going up.
And as you mentioned, you know, the loans are a big piece of this. So when a student goes to college and they’ll get a financial aid award letter that’ll basically say, here’s the headline tuition and here’s all the grant aid and here’s all the loans that you’re going to get. The college does not at all make it clear that students are taking out loans. So there was a study done a couple years ago. About 70% of these award letters from colleges did not actually say that a loan was part of that package. That students were not actually aware that they were taking on loans. And the colleges, I think, were somewhat deliberately hiding that fact because that enables them to charge higher prices. If you don’t, if you’re not fully honest about how much something is going to cost, it’s easier to raise the price of it. And so we see now that 15, 20% of students who have loans today don’t actually know that they have loans. And this ends up being a huge problem because if people don’t know they have loans, how are they supposed to know that they’re supposed to pay them back? And so that’s why, you know, I do have some sympathy with the students here because they have been somewhat bamboozled by the colleges and by the federal government into taking on loans that they didn’t necessarily know they were taking.
Parallels Between Healthcare and Higher Education [11:53]
Bob Zadek: And now I’m going to bring back the subject of healthcare. And the parallels between the economics of healthcare and the economics of student loans and college tuition are astonishing. It has been observed by economists that the two economic segments of our economy—the two segments of our economy are in healthcare and in college tuition, higher ed—those are the two segments where the costs, as Preston pointed out, vastly exceed the increase in costs, vastly exceed the inflation rate. And those are the two dominant segments of the economy, both the same, where the buyer doesn’t know and doesn’t care about the cost. The buyer, for the most part, the buyer is spending somebody else’s money, spending God’s money, but not spending the buyer’s money. So they don’t care. There’s no shopping for price because it’s somebody else’s money. And where the government dollars drive the cost. The availability of government money, we lose the control of the buyer, an intelligent buyer shopping for price. So both segments economically behave identically. Nobody cares about the cost, nobody shops for price, spending government’s money, let the government take care of the problem. The parallels are astonishing.
The Failure of Cost-Benefit Analysis [15:15]
Bob Zadek: Now, so we have students who see no correlation between borrowing the money with a tail, with an obligation to pay it back, and acquiring in college the resources to earn the money. Students don’t do a cost-benefit analysis. They don’t determine, well, how much will I earn because of this college education that otherwise I would not earn? And that positive number—it better be a positive number—that positive number ought to produce the revenue to pay back the loan and then some, which means the tuition is a good investment. People don’t buy stocks for it to go down. They buy stocks for it to go up. And investing in college education is, one would like to think, to some degree, if you’re going to do it on credit, you better acquire the wherewithal to pay it back.
So now we have students who didn’t do that analysis, weren’t invited to do the analysis, the creditor doesn’t do the analysis, the government doesn’t care if the student is acquiring the income stream to pay it back. So then we have students either drop out or graduate with a lot of debt. Now, remind us again, Preston, because it’s so important, that most of the—you said in the introduction—most of the problem is not the $100,000 medical school course, legal school, graduate business school, go and become in the finance sector of the economy. The problem is the student who probably shouldn’t have gone to college, should have gone to a trade school or something else, an apprentice program, but was encouraged by society to go to college, shouldn’t have been there in the first place, a bad purchase, and they end up with the debt.
So how much of the student loan debt—you gave us very large numbers—can you estimate for us how much goes into the pot of not likely to be able to be paid back? How big is that segment of the problem? The money that never should have been lent in the first place and is not likely to be paid back.
The Hidden Costs of Income-Driven Repayment [18:39]
Preston Cooper: That’s right. So about half of people who default on their student loans—the people who aren’t able to pay them back—owe less than $10,000. And you cannot get a college degree for $10,000. Those are people who only went to college for one or two semesters and then dropped out. And the federal government is probably going to be able to recover some of that money, but not all of it. I mean, if you default on your student loans, the government is still probably going to lose 20, 25 cents on the dollar.
But if you look at, you know, the big picture of where are the losses coming from on federal student loans, where are taxpayers taking the biggest hit? It’s actually something completely different. And what that is, is when people enroll in repayment plans called income-driven repayment. And this allows them to tie their loans to their income, tie their loan payments to their income, so their loan payments are never above a share of a certain income. And they’ll get all remaining debt forgiven after 20 years. And this is supposed to be a safety net program that’s supposed to help the people that I talked about earlier, the people who went to college for one or two semesters, dropped out and defaulted.
But actually, the people who are using this most are the people with the graduate degrees, the people with the law degrees, the people with the MBAs. They’re enrolling in these plans, they’re paying a small share of their income for 20 years, and then they’re going to get the rest of their loans basically forgiven. And because you can borrow an unlimited amount from the federal government if you’re a graduate student, the marginal dollar that you borrow is effectively free because of this program. So you see people running up huge debts, $100,000, $200,000, and they know they’re promised that most of this is going to get forgiven. The Education Department did an analysis of, well, what are how much are we going to lose on this thing? And they realized that it’s going to be about $435 billion are going to be lost on this program. And that amounts to about one-quarter of all outstanding federal student loans right now. So I mean, the short story is that we don’t necessarily need student loan forgiveness because a bunch of it is going to get forgiven anyways because of the way the system’s set up right now.
Federal Debt Collection Practices [23:01]
Bob Zadek: So when we are talking, you and I are talking this Sunday morning about the student loan problem, is the problem the existing system is going to result in huge forgiveness as you have just explained? And if so, then that’s already in place. What is the crisis that today, today has to be fixed? And we’re going to get into debt forgiveness in a moment, one of your favorite topics. But why is anybody talking about it? We have a bad program, IDRs, which is in place and nobody is talking about let’s repeal it. That’s not a conversation people are having. So why is there so much ink and media time and attention and governmental attention being spent on the subject of student loan debt? What is the crisis that government thinks has to be fixed?
Preston Cooper: Yeah, so I think the cynical answer is that it has to do with constituencies. So, you know, we see that in the 2020 election, Democrats got a very high share of the college-educated vote. And so maybe they say, well, we want to do something for them now. And I think that people in Washington, D.C., the politicians who are proposing student loan forgiveness, have a bit of a skewed view of what student loans actually are. Because the people that they know with student debt are the people who I mentioned earlier who have $100,000 in debt from law school. They don’t like paying their student loans, they’re not happy about it, but they’ve also got the high salary that will probably make their student loans not that big an issue for them.
And I think that kind of skews their view towards thinking that that is the problem, the people with the law school debt are the problem. But when actually, you know, the data shows that it’s people at the other end of the spectrum who are having the biggest issue. The people who went to school, who took on debt for a couple semesters, who dropped out, who still have the debt but they don’t have the degree, they don’t have any of the benefits of the degree. And you know, I would be okay with reallocating some of the help that we’re currently giving to law students and med students, reallocating some of that to help the people who went to college for a couple semesters and dropped out. Because as I mentioned, you know, they were kind of tricked by the federal government and colleges into taking on more debt than they were able to.
But I think that, you know, right now the student loan discussion as it’s being played out in Washington is very much focused around these people with very high debts, but also very high incomes who really do not need help from the federal government.
Bob Zadek: Now, if we did nothing, if we didn’t do anything to fix the IDR, the program that keys repayment to income—and that’s kind of sensible, it’s not going to put anybody per se into debtor’s prison, it’s not going to send them into bankruptcy court. My reference to debtor’s prison is just because I’m a student of economic history and I yearn for the good old days when you didn’t pay your debts you went into the slammer until your family got you out. Those are the days when you could be a creditor and walk on the sunny side of the street. But I digress, forgive me, Preston. I just, there’s a wonderful book called The Republic of Debtors which talks about the history of bankruptcy laws, and I got teary-eyed when I read the chapter on debtor’s prison. But people are going to get angry at me, I don’t want to belabor that subject, I’m a creditor’s lawyer.
But let’s get back to the subject matter. So if we did nothing, assuming we did nothing more with student debt, what bad things would we be reading about in five or ten years that we’re not reading about today? In short, why does anything in the world have to be done other than just keep what we’re doing, keep going forward, take a 25% write-off on the debt and let it go at that?
Preston Cooper: Sure. Well, so the people that I mentioned, the people who default on their student loans who have less than $10,000 of debt, those people—I mean, I definitely agree that, you know, they still signed on the dotted line and they should still be somewhat accountable for their loans—but the federal government can really make their life a living hell if they when borrowers get themselves into that situation. And it’s very much unlike private loans. So the federal government can garnish your wages, they can take up to 15% of your paycheck, they can take your Social Security benefits if you happen to be older, they can take your tax refunds, and they can add thousands of dollars in fees just to your balance.
And by the way, none of this is transparent. The government doesn’t send you a letter saying we’re adding fees to your balance, they just do it. And the borrower doesn’t even know sometimes that thousands of dollars of fees are being added, more interest is being added because the government is just is not transparent about it. And this is the story that I think the media is kind of ignoring about student debt. That it’s not the people with $100,000, it’s the people with very little student debt, less than $10,000, but have gotten themselves into this problem. And rather than trying to do good policy to help them out and get them to start paying their loans again, the federal government is just really bringing down the hammer and doing a lot of things to them that, you know, regulators would never tolerate at a private bank. And so that’s what I worry. You asked me about, you know, what we’ll be reading about five years from now. I’m not sure that we necessarily would be reading about that crisis because we’re not reading about that now, even though 27% of student borrowers are going to default at some point. But that crisis is going to be no less real and it’s not going to go away.
Bob Zadek: So the problem is, what’s interesting is when you just described the problem, the crisis, you were describing not the fact of the loan, but the aggressiveness by which the creditor, the government, collects. You were complaining—you weren’t really complaining, you’re a nice guy and complaining is not part of your DNA, I can tell—but you were kind of complaining that the government is kind of aggressive. And what’s fascinating about what you just said is we have so much debt collection federal regulation where the government, the Democrats mostly, are legislating all the time on what exactly you can do to collect a commercial, a consumer debt that was lent in the private sector. Debt collection practices get a lot of legislative attention when it’s the private sector doing the collecting. And yet you just described where the federal government is the world’s worst debt collector, that they have both powers and an approach that the private sector would love to have but they don’t have. It’s kind of hypocritical that the federal government feels it necessary, and maybe they’re right, about at least regulating debt collection, but yet they haven’t cleaned up their own debt collection practices. Just an observation.
Evaluating Forgiveness Proposals [25:53]
Bob Zadek: So now, but what’s interesting in what you said is I’m going to get now to if we accept—and by the way, I do not—but if we accept the fact that yes, there is something worthy of attention, there is a problem if you will, a crisis perhaps. If there is, now we have a bunch of different solutions. We have Biden is offering a solution which I’m going to ask you to comment on on whether it makes any sense. We have Schumer and Warren are putting out their trial balloons on a solution. We have your solution, which of course we’ll spend time to, and if I can squeeze in a few seconds, we have my solution.
So let’s talk at first about given the problem—you have described the problem as being the $10,000 and $20,000 student loan debts lent which the dropouts have. And you have explained the size of the problem. It’s wide but not very deep. That is to say, a lot of students have the debt but the debt is not that high. And now we have Biden. And what is Biden proposing to fix the problem? Now, of course, everything is in the trial balloon stage right now, but what are we reading about today about how Biden and his administration proposes to address the student loan problem?
Preston Cooper: So Biden’s proposal is just an across-the-board forgiveness of $10,000 for borrowers. So he’ll just take $10,000 off of everyone’s balance. And Senators Schumer and Warren say that doesn’t go far enough and they say we should take $50,000 off of everybody’s balance. And the $10,000 proposal would cost about $370 billion according to my calculations. The $50,000 proposal would cost about $1 trillion.
But the problem with both of these is they don’t address the fact that the federal government is going to make more than a trillion dollars in new loans over the next decade. So you get rid of people’s debt today, but tomorrow you’re still sending more loans out. And if you haven’t made any fundamental changes to the way that we’re making student loans, you’re basically just kicking the can down the road. You’re still going to have people defaulting on their loans next year and the year after that. You’re still going to have people getting into trouble. You’re still going to have the federal government, you know, going after people with a fury that, you know, a private debt collector would never even dream of doing. All these problems are still going to exist. You’re just going to delay them by a few years by kicking the can down the road for the cost of $1 trillion. And that’s why, you know, I really don’t find the student loan forgiveness proposals very compelling. I really don’t see them fixing the problem that I’ve laid out here because they don’t make any fundamental changes to the way we do student lending. They just kick the can down the road.
Moral Hazard and Future Borrowing [31:48]
Bob Zadek: And the other problem—maybe there’s more than one other problem—but what occurs to me is what do you say to the student who went to college for a semester and a half, ran up $15,000 in debt, left college, went and is now earning a living, perhaps has a family, is paying off that student debt and has over the past year at great sacrifice paid off the student debt? That hypothetical dropout was a sucker. Had he not paid off his debt in the 18 months right before the forgiveness was given, he would be $10,000 better off. The moral hazard, the moral lesson that the country is giving is don’t pay your debts. That’s a sucker play. So wouldn’t you have to then give money back to anybody who has repaid the debt in the past 18 months or two years or whatever it is, so that they are not proven to be a sucker? And then it’s giving grants to people who don’t need the money. You’re rewarding them for doing nothing other than paying back their debts. So how does that play into, or have I just answered my own question, the issue of student loan forgiveness?
Preston Cooper: You’re right. It creates all the wrong incentives. So something that’s going on right now is the federal government decided to put a suspension on student loan payments for 18 months because of the pandemic. And so right now student loan payments are due to resume in October. We’re going to have millions, tens of millions of borrowers who are suddenly going to have to start paying their loans again. If you as a borrower think that there might be $50,000 of forgiveness coming down the pipeline later, how likely are you to start repaying your loans again on October 1st? I would say, you know, much less likely than you would be otherwise. So we really are creating an incentive, not even with black-letter student loan forgiveness, but with just talking about student loan forgiveness so much, creating this perception that loans are going to be forgiven, we’re creating an incentive not to pay back your loans.
And in the long term, we’re also creating an incentive to borrow more in the future. I mentioned, you know, student loan forgiveness proposals don’t make any fundamental changes to the way we do student loans. We’re still going to be making as many loans tomorrow as we did yesterday. And if you’re a student seeing that these loans are getting forgiven because the outstanding stock of debt got to $1.7 trillion and we think that’s a big scary number so we’ve got to forgive some of it, and you say, well, they forgave student loans once, they’re probably going to forgive student loans again. So why wouldn’t I take out more debt today because I think that some of it’s going to get forgiven down the road? And the colleges will look at that and say, the borrowers know that they can borrow more, so why don’t we raise our prices? Because the federal government is putting in this giant implicit subsidy into the student loan program that’ll basically make it a free-for-all for borrowers to take out more loans and for colleges to raise their tuition prices. I mean, it’s a massive moral hazard comparable to what we saw during the mortgage crisis where the federal government said, we’re going to bail out banks, we’re going to bail out mortgage companies. So the banks said, why don’t we make a bunch of bad loans because we’re going to get bailed out no matter what? I really see history repeating itself if we go down the road of student loan forgiveness.
A New Approach: Institutional Accountability [33:32]
Bob Zadek: What would be your approach to this apparent probable crisis, although I’m a little loath to use the word crisis? What would be, in your opinion, a more economically sensible approach that’s more consistent with the values we want to instill in students?
Preston Cooper: Right. So I’ve a proposal out there to do this. I call it, you know, a student loan relief plan that doesn’t center around forgiveness. And part of it is, you know, making sure that the borrowers who are in distress, the people with less than $10,000 that I mentioned, that they do have a way to get into a safety net program like income-driven repayment so that they’re able to easily afford their loans, they’re not going to slip back into default.
But the centerpiece of it really is that we have to have some accountability on the schools, the colleges that are taking part in the student loan program right now and are basically getting off scot-free by forcing students to take on tens of thousands of dollars of debt, often not giving them any support so they just drop out, often having, you know, crappy programs that aren’t worth very much in the labor market. And the colleges basically are able to escape this completely scot-free. You know, the borrowers have the debt, the taxpayers suffer the losses, the colleges don’t have any accountability whatsoever. So my plan, you know, in order to help out those people with sub-$10,000 debts—I mean, that’s going to cost some money, not as much as forgiveness, but some money—we should pay for it with a new penalty on bad colleges. So if you’re running a college that’s basically a dropout factory, you’re leaving a lot of people unable to pay their debts, you’re leaving taxpayers on the hook for all of these debts that students can’t afford to pay, we’re going to penalize you and we’re going to make sure that you can’t just take advantage of the generosity of taxpayers without paying some penalty when your education doesn’t prove its worth.
Bob Zadek: What surprises me in your approach, which I like a lot because it puts the burden where it should be on the people selling the defective product—so that has appealed to me—but what would happen if we went back to the good old days and if the federal government were not in the business of making student loans at all? And in my view, putting the onus really where it belongs, why don’t the colleges make the loans and or otherwise take the entire credit risk? You kind of softly put the onus, put the burden, the credit risk on the colleges, but why not do it the way one who buys an auto loan, the seller who benefits by making the sale, the seller in order to make the sale makes an economic decision to finance the sale and let the buyer pay it back over time? Indeed, take auto loans simply as an example because I know a bit about it. Many auto sellers, they literally make more money on the financing than they do on the sale of the car. So the sale of the car is simply a way to get to make a loan, it’s not to sell a car per se.
But in that business model, then the colleges would be the creditors, they would be evaluating students as they do now, if they do, based upon likelihood of succeeding the way they do with college admissions today. And they also would be making, built into the equation, a credit examination. Now, it wouldn’t be on the student’s creditworthiness today because the student is probably not creditworthy, but they would evaluate the likelihood the student will be able to repay the loan armed with what the college has taught the student. Wouldn’t that put the onus exactly where it belongs? The federal government has no business in being in the student loan business, and I would say since Sputnik is kind of behind us, I would like to think, although maybe we’re going to panic when the Chinese start to send colonies to Mars and maybe we’ll have another program, but I’ll worry about that when the time arises. But today, I don’t see any justification as a policy matter for the government to be in the student loan business any more than I can justify the government being in the auto loan business or in the home mortgage business, which of course they are, different topic. But what does that work? Is that not your approach, as they sometimes say, on steroids?
Alternative Financing: ISAs and Bootcamps [39:42]
Preston Cooper: Well, Bob, so my plan was calibrated to my expectations for Congress, which are already low to begin with, so I wanted to give them kind of a low hurdle to clear. But I think in the longer term, that is the exactly the approach we need. That, you know, right now student loans create exactly the wrong incentives for colleges. The college’s incentive right now is to basically raise as much money from the federal government as possible, take in all the grants and loans, and then once you have that money, just kick the student out on the street. What we need really is an approach like you highlighted that aligns the incentives between the student and the college. So that if the college is the one actually making the loan and the student is then paying it back, the college is not going to get paid unless the student actually repays the loan. And the student’s not going to repay the loan unless they actually get a good job, unless they have a degree that’s, you know, that has useful skills that are valuable in the labor market that will enable them to get, you know, a middle-class job, an upper-middle-class job that will actually enable them to pay back the loan. The college isn’t going to get paid unless they do that under your system, which I think is a good one.
And the good news is that there are actually some colleges that are trying out this model. So one is Purdue University, under Governor Mitch Daniels. He took over as president of Purdue University in Indiana after he left politics, and he instituted this model where students, in lieu of a federal student loan, they would be able to take out a certain amount of financing from the university itself and then pay that back, you know, in proportion to their earnings over the next eight or ten years. So that Purdue actually does have an incentive to make sure that the education is up to snuff and make sure that it actually has value in the labor market. You know, alternatives to college such as coding bootcamps, which we’ve heard a lot about—you’re in California, so I’m sure you’ve heard about those—basically short-term skills training academies, they’re also using this model where they’re financing it themselves. The student doesn’t pay anything until they actually get a job and they’re going to pay, you know, in proportion to how much they earn so that the college’s fortunes rise and fall with the student’s earnings, which is exactly the kind of alignment of incentives we need. And while I would love to see, you know, this model implemented nationwide so that we wouldn’t necessarily have to have the federal government involved in student loans at all, I also think that there are ways that individual colleges and the private sector can do this right now if they want to, if they have the will to actually experiment with this new model. And there are some places which are doing it and seems to be working out pretty well for them. And I hope to see more of it. I hope that’s the future.
Conclusion and International Comparisons [42:10]
Bob Zadek: One final observation, Preston. I read a statistic, I think you published it in fact, that showed the—I don’t remember exactly—we were just behind, we were number two in the world right behind Luxembourg, believe it or not, on the amount of cost per student we spend on the tuition cost. And what struck me when I read that statistic that you offered in one of your articles that you published is the complaint about healthcare is we spend too much of healthcare dollars per patient with bad outcomes. It’s once again, I’ll close with the parallel between healthcare and higher education. And in one area, the government wants to take over healthcare. In the other area, the government doesn’t want to take over higher education, although since the problems are identical, the solutions ought to be the same, headlined a bit of hypocrisy. That’s the headline.
Now, Preston, thank you. Before you leave, thank you so much for being on the show with us. It was great fun. And tell us about the Foundation for Research on Equal Opportunity. It’s an important organization. We have about a minute, Preston. Tell us about that.
Preston Cooper: Thanks, Bob. So Foundation for Research on Equal Opportunity, where I’m a research fellow, we are a free-market-oriented think tank and we’re dedicated to using free-market policies to improve the lives of people below the median income. And so we do a lot of research into higher education, where I lead the shop there, and into K-12, into energy policy, into housing, and into healthcare. So all of these issues where, as you mentioned, cost inflation is a big problem. Healthcare, housing, education, we all know that the costs are going up well in excess of inflation and something should be done about that from a free-market orientation. That a lot of that is the government’s fault and getting the government out of it can help a lot with those problems. So that’s the work we do and we’re excited to share it with the world.
Bob Zadek: Preston, thank you so much. This has been Bob Zadek. I’ve been speaking with Preston Cooper, a PhD student at GMU. We’ve been talking about higher education. Is there a problem? Yes. Is there a solution? You bet. Follow Preston’s writing. Preston, thank you so much for being on the show with us. It was great fun. And thank you to my friends out there for hanging in there for an hour on this very important topic. Thank you so much and have a good Sunday.
Preston Cooper: Thank you.