Friday, November 30, 2018

College debt begins with a perilous teen fantasy. If your kid's in high school, the brain-washing is already done

As U.S. interest rates rise, outstanding college indebtedness rises, and both the number of defaulting borrowers and the proportion of default-category loans increases, it’s timely to ask What is college debt?

In concrete terms, college debt is the second-largest debt category in the U.S. (The first is home mortgages. It surpasses consumer and credit card debt). It is $1.5 trillion outstanding, representing 44 million borrowers. By 2023, it’s estimated that 40% of those borrowers will be in default. For the class of 2016, the average debt load is $37,172. By debt volume, 11% of that $1.5 trillion is already in default (over 90-days non-repayment), each quarter another 2% falls into default. Another 14% of that debt volume is in deferment or forbearance.

College debt is a different kind of debt from mortgages, auto-loans, corporate debt or working capital. College debt has no collateral. The student-borrower usually has no income history or assets. He has
No income, assets or business plan.
no business plan. There is no incremental demonstration of his strategic viability. Unlike credit card debt, there isn’t even an incremental demonstration of repayment culture, since repayment is typically deferred until after the completion of studies. College debt is nearly impossible to discharge through bankruptcy (The College Investor explains how here). There is no pledged asset that can be foreclosed or short-sold to facilitate the borrower’s climbing out. It is very difficult to run away from.

This handy tool provided by may be a helpful visualization of repayments by loan amount at current interest rates. Assuming an interest rate of 6.8% and a 10-year repayment plan, a graduate paying off the average debt load of $37,172 would expect to pay $428 per month. FinAid also advises what a borrower should aim to earn per annum in order to manage his loan-size; for this average loan volume, he needs to earn $51,000 to manage repayments if his household size is 1 person--and that's less likely over 10 years. 

College debt and default are growing differently for different groups, and that’s also revealing some deeper problems. A recent Brookings study found that black and African-American borrowers on average hold three-times greater outstanding college loan volume than white borrowers, and default five-times more frequently. Attendees at for-profit colleges and universities show default rates that are almost double that of graduates from 4-year undergraduate programs at public universities. The borrower profile is aging, too, and that tells us something not only about later-in-life education, but longevity of debt; 30-39 year-olds hold 30% of the $1.5 trillion college debt, and that has increased by nearly a third in the past 5 years. Borrowers over age 40 constitute 36% of the 44 million outstanding borrowers; they are paying off a long tail-end of educational leveraging.

Sixty-percent of that $1.5 trillion is undergraduate debt. And within that, the worst-performing segment is for-profit colleges and students who started but didn’t complete degrees.

Interestingly, borrower default does not correlate with overall initial loan size, suggesting that it’s not just a question of over-borrowing by volume that drives the college debt trap. According to the Brookings study, defaults are highest among those who started with initially relatively smaller loans (e.g., $10,000-20,000), but these borrowers are stretching out repayment periods, compounding overall debt well into their late-30s and 40s.

This is where it may help to read through the numbers a cultural narrative about young people. How does the fairy tale start?
Here we see an uncertain young person. It’s not clear that she is excited about classroom learning; the practice of lecture-listening, note-taking, essay-writing might not come easily. But nor has school introduced or allowed any time that she might learn a skill on Udemy, take up a 30-hour-week internship, work for her parents, or seek an online micro-credential. She found the secondary classroom monotonous and dull; her focus during those years was somewhere else, disengaged, waiting for the bell to ring. Doing as little as possible was a release from the annoying controls. Somewhere late in that process she sensed an external urgency that she needed to “make something of herself”, and college seemed to be the key.

Here we see secondary teachers and administrators. They see themselves as champions of knowledge, the stamping out of young people's days into uniform templates around uniform subjects as a social good driving equality and opportunity. Their credibility rides on the claim that such-and-such percentage of the graduating class is moving on to 4-year colleges. These claims are held up
Reach for the stars, right?
from state to state and town to town as if all students need and want the same thing. They are also judged on graduation rates, which had better improve year-on-year during anybody’s tenure. And one way to make sure that happens is to fudge it; let students take summary refreshers, inflate grades. They welcome the proliferation of colleges of all stripes, because it means there is a place for everybody; any kind of student, if goaded along to apply, can get in somewhere. And that’s the statistic that counts.

Here we see the parents and community. Who wouldn’t want to believe that anybody can become anything? That everything is possible when you put your mind to it? That the sky’s the limit? This is the American-dream narrative. And families buy into it bit by bit, so that they are not thinking about the $1.5 trillion, or 25-years of $250/month payments, disillusionment and entrapment at the beginning. Instead, they are thinking about high school recognitions and how good that feels. And sports and clubs, and putting their child in the right light. Then PSATs and how important it is to prepare for standardized tests. Then SATs and application packages and where so-and-so got in. As in an auto showroom, it’s about momentum, pride, and feeling like a winner. The financing package comes last.

Here we see the college industry. There are literally thousands of these guys, and they come in every possible form. All of them are claiming to make dreams come true. They keep up the appearance of selectivity, print viewbooks, solicit 15-year olds, and impress grandmothers with tours of ivy-covered buildings and quadrangles. They raise money, show off new athletic centers, choose and partially-fund incoming students through an opaque process that leaves everyone uncertain how much things really cost and what it really means to “get in”.

Here we see the first employer. She couldn’t care less what the 24-year old applicant read in freshman composition, and will never ask her to write an essay about anything. She doesn’t ask for political discourse. She is looking for an adaptable person who will learn fast, cooperate within her team, and master skills specific to this job. Her HR officer assumed that meant that a BA would be required, so she has a drop-down menu, and cut out all the candidates who don’t have one. Now the employer is surprised during interviews at how little experience, and how distant from reality her candidates seem to be.

Something like this iterates during the young worker’s life, as ambitions for advancement and fears about raising a family on a limited income drive further loan-taking and degree-seeking.

If we can be honest with ourselves about what’s driving college debt, then policymakers would be honest, too, about what it’s going to take to fix this.

It’s not a question of making college more affordable through subsidy. The most frequent defaulters took relatively smaller initial loans. Further, there’s decades of evidence (see this Federal Reserve Bank of New York 2017 staff study) that universities hike tuitions year-on-year directly absorbing all increases in federal student loan support, so that it’s unlikely that additional subsidy would reduce average loan volumes.

And I would further counter Scott-Clayton’s two take-aways from the 2017 Brookings study cited above:

--That degree-attainment should be “improved” for enrolled students, a vague allusion to the kind of grade-inflation, course-repeating and watering-down of skills requirements that does nobody any real service neither in secondary nor university education; to the contrary, it keeps pumping hot air into a degree-inflated culture, such that the degree itself diminishes in value as more people of varied scholastic aptitude all have one;

--That income-contingent loan repayment options should be promoted, which implies substantially more expensive and risky loans at the outset (and perhaps the need for loan pricing that takes account of degree type, major, non-profit/profit-status of the school), or an uncertain Federal government posture toward future loan forgiveness (and uncertainty itself may undermine repayment culture), or introducing another ex-ante forgiveness scheme (which perversely incentivizes greater loan-taking, all else equal).

If we can be honest with ourselves, the college debt problem is about a well-intentioned but misdirected dream that moves further and further from reality. And one particular industry has hitched itself (and taxpayer liabilities) to that dream, politicized it, amplified it, so that the dream is about loving our children, valuing knowledge, self-improvement and the American way. Who could argue with that?

The alternative dream is modest, unsexy, and not-so-fairy-tale-like. The kids who have been vegetating in secondary school should be broken out, to spend more hours pursuing with energy
Time for a new fairy-tale narrative.
and enthusiasm things that they actually want to do. And communities need to re-calibrate expectations of teenagers not to measure-up on scores and standards, but to diversify, volunteer, get involved in the real economy, connect with mentors. Students with limited motivation and showing weak scholastic aptitude need to find their own paths, even when this means that teachers and parents won’t see the standard progress indicators. All of this will look a lot more sloppy, cut-and-paste, and individualized than it does now.

Kids won’t be pushed off a conveyor belt by self-interested secondary administrators, but would self-launch at different times into online studies, micro-credentials, vocational trainings, and a wider variety of much lower-cost learning. [Professional schools and certifications are still out there, but they shouldn’t need a BA to get in!] Parents and young people won’t take a gigantic loan for the “big event” of 4-year college, but rather will have to make with their children month-by-month cost-benefit decisions about online credentials, visiting enrollment, internship opportunities and housing costs that begin at a much earlier age and may continue well into the young person’s adult life (and policy regarding the use of 529 educational savings accounts should follow suit and become more flexible!). Thousands of charlatan and half-baked colleges need to go under. And the best of individual trainers and educators have been emerging (for a decade already!) in online and blended, pay-per-use formats that make interactive, quality learning far more accessible.

It’s the culture that has to catch up with already-existent potential.
It’s a brain-washed, false American dream that has to be stopped where it starts in the families of young teens.

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