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Eating the Poor: The College Debt Trap

It’s pretty clear that federal housing policy not only helped inflate the housing bubble, but wrecked the prospects of exactly the low income, marginal, first time home buyers well intentioned people were trying to help. The same thing seems to be happening in the world of higher ed: low income students who are struggling in higher ed are getting the royal shaft as the result of poorly thought through policies intended to help them.

The Wall Street Journal recently ran a good piece that illustrates how things have gone wrong. In a rush to expand opportunities for people to go to college and get a foothold in the middle class, we have inadvertently created a large class of citizens who are struggling with crushing debt that they have little hope of paying off.

Economists say the U.S. needs more college graduates in order to remain competitive. But expanding the pool of graduates means reaching out to low-income families, immigrants, minorities and children whose parents didn’t earn degrees. Efforts to help such students attend college have often outpaced efforts to make sure they graduate.

The student loan system’s biggest victims are exactly the people policy makers most want to help: marginal students whose chances of finishing are not great. There are at least three perverse consequences to our policies:

1. Federal support and available loans push up the costs of higher ed. Free money distorts the market in a big way.

2. Policy aimed at making college degrees more common increases the disadvantage for those who do not have or are unable to earn these degrees, and it adds to the pressure on everyone to at least give college a try.

3. When students fail at college, student loans become a permanent ball and chain for workers stuck at the low end of the labor market.

Twice in a row, well intentioned federal policies aimed at helping low income people make it into the middle class have spectacularly backfired and imposed ruinous losses on exactly the people in our society who can least afford them. The answer isn’t to stop thinking about how to help low income people do better in life, but it’s clear that some of our basic policy assumptions need to be rethought.

We need to find a better way.

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