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July 18, 2012

Middle-Aged Drowning in Student Debt

A new report in the Wall Street Journal details how delinquency on student loan debt is actually highest among the middle-aged, defined roughly as adults between 40 and 60. Delinquencies for those in their 40s stands at an alarming 11.9 percent. Meanwhile, over the past seven years debt rates for those in their 50s and 60s have doubled and tripled, respectively:

Many debtors over 40 are still paying balances from college years ago, while their home values and savings have declined sharply in recent years. Some have stopped payments after losing jobs. Many parents—no longer able to tap home equity to pay for their children’s education—are taking out new student loans to do so. An Education Department program that provides loans to parents to fund their kids’ education is among the fastest-growing of the government’s education loan programs.

Sadly, government’s fingerprints are all over this mess. In a well-intentioned effort to make higher education more widely accessible, the government offered large student loans without asking many questions. Two things happened.

First, colleges kept raising tuition. College tuition has been rising faster than inflation for quite some time, in part because schools added layers of administrative bureaucracy and offered gold-plated student services. As long as students could rely on government loans to help pay their way, colleges have chosen to compete on amenities rather than on value.

Second, students got out of the habit of thinking about a college education as an economic decision. Students were encouraged by parents, teachers, college guidebooks and guidance counselors to find the school of their dreams rather than a school that they could afford. Unfortunately, if you borrow money, you have to pay it back. Many graduates are now learning this lesson years too late.

Banks and Wall Street, as usual, got into this act too. And with all that student debt on their hands, they lobbied to make sure it couldn’t be discharged in bankruptcy. Now we have $1 trillion of student debt, and a lot of it can’t be repaired. Lives are being damaged, and young people who should be thinking about starting families and careers are instead being saddled with new burdens.

This is terrible social policy. It is deeply destructive. Education costs have to come down, dramatically. Work and school need to be better integrated, so that students can earn while they learn rather than rolling up so much debt. And parents, students, and their counselors need to start thinking very carefully about what kind of education they can afford.

Posted in Blue Social Model, Education, Quick Takes
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  • Jim.

    Even looking at it as an economic decision has its drawbacks.

    Thinking about it as an economic decision, if you make even (say) $10 a month more, after deducting your loan payments, it’s a “good” decision. Are you richer? Yeah, but not much.

    Contrast this with the usual vision of college as a ticket to the middle (or upper-middle) class. Or with the vision of college graduates, on the part of economists and government planners, as people with high levels of disposable income. Oops.

    Worst of all, you’re credentialing people who are not capable of reasoning this out! That, and people who have the sense to come to these conclusions remain uncredentialed. No wonder HR departments are having so much trouble filling positions, even in a recession.

    Taking on huge amounts of college debt doesn’t satisfy peoples’ expectations even when it isn’t a “good” decision.

    Our system is deeply screwed up.

    One solution? Allow student loan debt to be discharged in bankruptcy, and tell the banks caveat emptor. Tell the colleges to find amenities and administrative positions to cut. It’s a way to indirectly tax them if nothing else.

  • Corlyss

    “Unfortunately, if you borrow money, you have to pay it back.”

    Two observations:
    1) It all depends on who you are.
    2) This is a consequence. People don’t like consequences. See #1.

    Interestingly, I attended a performance of Faust at the Utah Festival Opera last week. In a little backgrounding before the curtain went up, Michael Ballam, the UFO director, spoke about how Faust was the most performed opera in the US in the 19th & 20th Centuries up to about the 1950s. After the 1950s, performance dropped off, he says, because as a society we began to believe actions don’t have to have consequences. We don’t like having to pay the piper for our poor decisions. Not coincidentally, the government began after the war to relieve citizens of the burdens of consequences. Poor? Don’t worry or try too hard to work. Government will give you a living stipend. Borrow too much? Government will give you a pass, either with an outright bailout or with a generous bankruptcy law. Feel oppressed? Government will give you economic breaks, like preferential treatment in contracting with the government. Disabled, which of course is no fault of your own? Government will pass a law requiring employers to take you anyway, regardless of your abilities. Family member gets sick? Government will require your boss to keep you on the payroll anyway. Lose your health insurance? Government will mandate that hospitals have to treat you regardless of your ability to pay.

    Consquences are, or used to be, God’s or Nature’s way of teaching you not to be stupid and to make provision for yourself and yours against harder times. Now it’s the Government’s role to make every decision free of unpleasant results.

    And we wonder why a sense of responsibility for one’s actions is so hard to find these days.

  • Will

    Part of the problem with college costs is that services have become more expensive in recent decades just as commodities and technology cost less. I’d be interested to see what Mead thinks about this point. Other services, whether menial labor or professional expertise in law, medicine, and business, are most costly than decades before. I don’t think faculty and most university employees are overpaid. Nor do I see how you qualified people for less money. The fact that colleges could raise tuition and have the market accept it provides one incentive, but salaries and benefits for employees–and the competition for the best employees–is another factor.

    I do agree that the status quo is not sustainable and that a lot of students don’t need to be in college, especially when they are only there for a credential rather than an education.

  • An

    Based on CPI and the College Board figures for four-year private school, tuition has outpaced inflation between 1.5 and 2 times inflation. Cost of tuition grows 7-8% a year. Schools have spent large sums on buildings, raised the wages and benefits of teachers, all while massively increasing the amount of administers. Like the bloated public schools, most universities have an administrative staff equal or larger to the faculty. These costs have been passed on to students, knowing full well the government would increase grants, and students would be willing to take out loans.

    Skyrocketing tuition follows the story of the western welfare state. It’s cost and inefficiencies threaten its sustainability.

  • John Burke

    Middle age 40 to 60? Reminds me of a line from a comedian — I think it was Nipsy Russell — who said that if 55 was middle aged, how come you never come across any 110 year old dudes?

    If people over 50 are still paying student loans, we are surely all doomed.

  • cacrucil

    If student debt could be discharged in bankruptcy, higher ed would reform instantly. If debt could be discharged in bankruptcy after say, a period of ten years, banks would put a limit on how much one can borrow. Many universities would then have to meet that price, as there aren’t enough trust fund babies to keep them all going.

    They would then offer a lot of lower cost options, like online courses, so as to be able to offer their degrees at a price that does not exceed the amount that an average student can borrow.

    The idea here is very basic. When the bank’s and university’s money is at stake, reform will happen quickly. When it just average students mired in debt, everyone feels a little bit bad, but alas the problem can wait for tomorrow.

  • Tom Mulrooney

    I keep waiting, maybe in vain, for the opening of Walmart University. It will offer the courses essential to a baccalaureate degree, emphasizing those needed to prepare students for subsequent training in medicine, law, sciences. The faculty will be first class, but the facilities spartan (except where quality labs are neded). Students who want to play sports will be directed to nearby fitness centers. Those who want to live in nice apartments will be referred to realty agents. A cafeteria will sell healthful, if unimaginative meals.
    The idea, like that of its namesake retailer, will be to provide a valuable commodity (in this case, knowledge and skills) at the lowest possible price. “The lowest price, always, ” to coin a phrase.

    I

  • Kansas Scott

    This terrible situation is the classic case of unintended consequences caused by trying to do the “right thing.”

    Wanting to help more people go to college Congress acted to make loans more available. This infusion of cash helped colleges raise their prices as their consumers became more and more inoculated from the true cost. Students just took a loan check and passed it along, no problem, no cost.

    Colleges also became inoculated from the changing reality that should have been apparent from the unsustainable rise in costs of doing it the way they’ve always done it. However, these costs were sustainable because of all the loan money floating in allowing them to raise tuition.

    Wanting to do the “right thing” and help people is used to justify a lot. However, I never see the folks who cause all of this pain down the road standing up and saying they were wrong and accepting responsibility for damaged lives.

    By the time the unintended consequences have struck, they have moved on to the next project and are wringing their hands at those who oppose them for their continued sketchy comprehension of cause and effect.

  • Tom Gates

    Anyone who has been a trustee of a private secondary or high education institution knows that the tuition list price is not what most students pay. Generally these schools know that 30 to 35% of the students will pay the sticker price. At my Son’s private secondary school,50% of the student tuitions’ were paid directly by grandparents. Any surprise tuitions increased by more than 8% per year?

    The 30 to 35% who pay the full ride help subsidize the remaining 65 to 70% of the student body. For example, at my University, a private school that sports tuition in access of $40K a year, students from military families only pay tuition equivalent to a local public university. The fact is, tuitions are a nonpublic redistribution scam that has been going on for years. Who gets screwed in this? Middle class parents of middle class parents.

  • http://wwrtc.blogspot.com Art Deco

    Now we have $1 trillion of student debt, and a lot of it can’t be repaired.

    Umm, we have $13 tn worth of mortgage debt.

    There are approximately 60 million people with at least an associate’s degree in this country. Mean debt loads per capita would thus be about $16,000.

    Subventions to higher education are bad and have introduced a number of economic pathologies which need to be contained. Try this:

    1. Federal legislation which would require that the contract between tertiary institutes in one state and aspirant students in another (or aspirant students abroad) follow a template. The institutes would have the option of abandoning out of state recruitment, offering a different contract to students recruited in-state, or offering all prospective students the understanding incorporated in the template.

    2. The template would have the following features:

    a. The student may not be compelled to change his state of residency as a price of admission.

    b. An academic year would consist of 500 (50 minute) sessions composed of lectures and examinations. A semester would thus be 250 sessions and a quarter 167 hours. A course would consist of 17 sessions per credit.

    c. The institute would offer degrees consisting of 1, 2, 3, or 4 academic years entirely composed of study of a specific subject. If it offered a 4 year option in a given subject, it would have to offer a 3, 2, and 1 year option; if it offered a 3 year option, it would have to offer a 2 and a 1 year option; if it offered a 2 year option, it would have to offer a 1 year option. It would also be required to offer a certificate program of < 1 year of study in a selection of subjects. Baccalaureate degrees would not be an option.

    d. Degrees offered would have to be drawn from a list of roughly 120 subjects, of which about half would be academic and half vocational.

    e. Specific courses within a program required for graduation would have to be offered every term of an academic year.

    3. Any degree program offered would have to pass accrediting standards before it was instituted.

    –

    Appended to this:

    Gutting federal employment discrimination law. Have it apply only to employers domiciled in multiple states and have it consist only of a requirement to publish an audited statement delineating the demographics of every strata of their workforce, stock and flow. It is important that commercial companies be permitted to use written examinations rather than academic credentials to sort their labor pool. They need to be free of the anxiety that the implement they use will trigger a lawsuit.

    —

    Append to this:

    An end to all subsides to higher education whether effected through grants to institutions, grants to students, concessionary rates on loans, &c. Relax some of the constraints on discharging student loan debt in bankruptcy.

    –

    Append to this:

    –Have all employment agreements between institutions in one state and aspirant professors in another be for a term of one to twelve semesters, without even a contingent promise of tenure.

    –Work at the state level to induce a similar requirement for contracts of employment between institution and aspirant professor domiciled in the same state.

    –Incorporate into federal law a definition of an academic doctorate as having completed 4 years of course work in that subject followed by the completion of a dissertation supervised by a board of accredited scholars.

    –Require in federal law that an institution in one state offering dissertation supervision to an aspirant in another provide an audited disclosure statement to the aspirant. The disclosure statement would be in the form of a series of tables which would delineate the fate of each admitted to the dissertation program in question over the previous 40-odd years: whether they completed their program, where they are teaching, if any place, and what sort of teaching contract they have.

    –

    A great many schools will have to be liquidate in bankruptcy.

  • http://wwrtc.blogspot.com Art Deco

    I would wager that much of that student debt on the books of people over 45 was acquired in the course of fairly recent career changes.

  • Kris

    I am middle-aged and still haven’t managed to pay off my student loans. What’s that, daughter mine? Yes, of course you should get the best possible education that student loans can buy!

  • Corlyss

    @ Art

    “Umm, we have $13 tn worth of mortgage debt.

    Don’t worry. That can’t be repaired either.

  • Eurydice

    Hmmm, it seems that the War On The Young isn’t limited to just the young.

    @Jim #1 – One of the reasons HR departments are having such a hard time filling positions is that they’re not trying very hard. They use computers to sort applicants according to overly-specific criteria and they expect the university system to produce employees who don’t need to be trained.

  • thibaud

    Tom – “Who gets screwed in this? Middle class parents of middle class parents.”

    Sounds rather Oedipal. As Tom Lehrer sang:

    Yes he loved his mother like no other.
    His daughter was his sister and his son was his brother.
    One thing on which you can depend is,
    He sure knew who a boy’s best friend is!

    When he found what he had done,
    He tore his eyes out one by one.
    A tragic end to a loyal son
    Who loved his mother.

    So be sweet and kind to mother,
    Now and then have a chat.
    Buy her candy or some flowers or a brand new hat.
    But maybe you had better let it go at that!

  • T

    “. . . schools added layers of administrative bureaucracy and offered gold-plated student services.”

    IMO it’s the result of 70 years of a Progressive big govt Weltanschauung. It is not coincidental this was simultaneously happening to cities and stateswhich were creating layers of bureaucracy and gold plated municipal job security and pensions (California is an egregious example).

    “This is terrible social policy,” and as Herb Stein noted, what can’t go on forever won’t!

  • Patricia

    A large part of the administrative bloat is due to federal rules and regs — the strings that come along with the dollars. That is one reason why federal grants are so pernicious. The entire IRB bureaucracy is mandated by the feds and a lot of the diversity crew too. But now good old State U is hooked on dollars. In CA tho the money is running out and it’s a desperate race to preserve the status quo for the privileged. The thought of no trips to foreign…oops international parties…conferences is unthinkable!

  • BooMushroom

    Hmmm, it seems that the War On The Young isn’t limited to just the young.

    @Jim #1 – One of the reasons HR departments are having such a hard time filling positions is that they’re not trying very hard. They use computers to sort applicants according to overly-specific criteria and they expect the university system to produce employees who don’t need to be trained.

    ^This! Where the hell did on the job training go?

  • Tx Doc

    Art Deco – sounds admirable. I spent 5 1/2 years as an undergraduate HS class 69 – Uncle Sam pulled me away for awhile – and it took forever to wade through the crap and finish – then more in med school.
    Now, near retirement, I am back in school via the London School of Economics External Degree program – BSc candidate in Mathematics and Economics. Get the course guide and books – see ya’ in a year for the exam – reading for the degree – dramatically cheaper that the MBA I did several years ago.
    Lecture, lab and recitation work was and is generally minimally productive – yes, I enjoyed AA Bartlett’s physics lectures in Boulder – but a recorded format would have been much more efficient.

    Most importantly, the formal University is clearly getting in the way of true learning as opposed to education, just like the local school districts have done for decades in the elementary and secondary sphere.

  • MARC

    Hey, for those who demonize loan defaulters and say it was their bad decision, note this:

    My loan was taken out in 1992. The terms of the loan included as a matter of contractual construction those laws relating to bankruptcy. Presumably the interest charged on the loan reflected in some way the ability to file bankruptcy. This was the contract. The banks/lenders rewrote the terms of the contract when they lobbied to do away with a debtor’s ability to discharge the debt in bankruptcy. This is just wrong. They rewrote the contract, after the fact. When I took the loan I always knew that if things got bad then I’d have recourse in bankruptcy .. it was a straight up calculation. Had I know that I could be pursued for the rest of my life, have my wages administratively garnished for the rest of my life, have my tax returns seized for the rest of my life, then guess what, “i would not have taken the fricken loan”. I was conned into involuntary life time servitude and yes I am whining :) but that is my right, well, until legislatively that is also taken away.

  • Nate W

    @Eurydice is on the money in this regard “they expect the university system to produce employees who don’t need to be trained.”

    US Steel recently ended their IT co-op program which had been running for years, allowing college students in c.s / i.s. valuable work experience, while allowing them an easy recruiting tool for the co-ops who showed promise. (disclosure – I was one of the last classes of co-ops at X).

    These days, business folks expect colleges to train people for a job, but professors all say “you don’t come to college to learn a job”. There’s a serious disconnect here.

  • Nate Hertel

    A lot of these comments seem to suggest high faculty salaries and rote instruction costs are a main source of the problem. Hogwash.

    Administrators outnumber faculty in many individual schools already and the Fed’l Department of Education estimates that by 2014 there will be more administrators than instructors at American four-year nonprofit colleges.

    Like with entitlement reform, public employee pension reform (hello defined contribution!), and so many other “insurmountable problems”, the solutions are incredibly simple but we have no will to overcome the entrenched interests and negative inertia.

    I’m 28, married, with no kids yet. Should I move to Australia?

  • Matt

    Sorry there Coryless but you’re missing the point. Student loans were sold by pretty everybody as “good debt” because it would result in a better educated, better monied populace. We were sold a bill of goods that didn’t live up to the advertising. The banks and schools benefited, while its students are floundering under all of the debt. And the thing is, they can’t get rid of it. Ever. How many mistakes can you make that you can never fix? Not too many – this is America. But student loans? Absolutely an albatross around the neck of every single person that has them. Its simple- they should be dischargeable in bankruptcy and a course correction made for new students, so they don’t face the same future, which appears bleak and hopeless, when you realize you’ll never be able to pay off your loans in your lifetime.

  • Marty

    Some commenters seem to assume that making student looan debt not dischargeable in bankruptcy has no sound policy basis, so we can just get rid of that. The rationale is that someone graduates witha lot of debt and declares bankruptcy while they have almost no assets, leaving teh creditord holding the whole bag. But you can’t take away the education or the credential–so there is a huge moral hazard. If you allow that debt to be washed away by bankruptcy no sane person would ever make such a loan. Of course now that the govt has replaced banks as the entity making the loans, “sane” has little to do with it, but if you let it be dealt with in bankruptcty it is really not a loan anymore, it’s just a gift.

    Make the loan the real financial responsibility of the school, and allow bankruptcy after something like 5-10 years, you might incent some interesting changes.

    MARC has a point, tho, it’s not fair for one party to unilaterally change the terms of a loan, to the disadvantage of the other party.

    I doubt the “good intentions” claim… maybe for people who just went along, but the schools and politicians who create and push these programs know exactly for whose benefit they are working, and it’s not the students’.

    Will at #3 is writing about Baumol’s Cost Disease, but there is nothing inherent in higher ed that makes controlling labor costs all that hard–if all that free money wasn’t coming in, they would not waste so much on useless administrative flights of fancy and unneeded development programs, and then start using technology and other tools to improve efficiency. With no incentive to be prudent, they aren’t.

  • Alex

    I am a teacher and I owe 90K and will be paying my loan until I am about 70.

    I had no problem paying the principle plus interest. However, an early forbearance and consolidations has pushed the amount I owe dramatically higher than the initial loan I took. Now I am stuck. Just doesn’t seem right or fair.

  • http://wwrtc.blogspot.com Art Deco

    If you allow that debt to be washed away by bankruptcy no sane person would ever make such a loan.

    Could we attempt some sort of median between treating student loan debt as ordinary consumer debt and requiring quadriplegia or death ‘ere discharging it?

  • marc

    “If you allow that debt to be washed away by bankruptcy no sane person would ever make such a loan.”

    Your comments are overall right on. however, as relates to the above stated quote, a loan was in fact made to me and many others, which loan, was made when the bankruptcy laws allowed for the discharge of student loan debt. I submit they were not crazy but rather making a business decision.

    The interest rate, along with certain credit criteria, were used by the lenders to take into account the possibility of the debtor’s filing of bankruptcy. Indeed, credit card issuers routinely issue loans knowing that an y debt incurred is possibly subject to bankruptcy. It is a straight up statistical bet on their part, the interest rate/credit check, being their most valuable betting based criteria.

    Instead of sticking with the terms of the exchange/bet, the lending institutions changed the rules such that they never risked anything! What equitable, legal, reasonable, schema allows for such a result?

  • T

    I suggest that there is no real alternative but to hold the lenders responsible for originating the debt and the recipients responsible for paying. The fault comes in the selling of the ephemeral credential by the universities; they can charge what the want for an intangible and get off scot-free whteher the loan is repaid or not.

    Let’s make the university the loan recipient which, then, awards the $$ to the accepted student with some promise to repay the university. Let that promise to repay the university be subject to bankruptcy.

    Harvard has (what was) a $55 billion endowment. Let them use THAT to collateralize loans for the degrees they offer and watch how quickly they become fiscally responsible.

  • http://kavanna.blogspot.com Kavanna

    Here’s the master graph:

    http://seekingalpha.com/article/224333-visualizing-the-u-s-higher-education-bubble

    And all the books that explain it, by Reynolds, Ginsberg, Hacker & Dreifus, Tamanaha, Rosen, and so on.

  • teapartydoc

    The Blue Model for education doesn’t seem to be working out.

  • justaguy

    Two “sayings” that reflect the reality of life bear on the issue: 1)The stupid will be punished;and 2) A fool and his money will soon be parted. The issue of people in their 40s still having large student loans reflect 1 and 2. There will always be those that take absurd chances (Masters of Puppetry and such) and thanks to government student loan programs open to anyone for anything, those taking absurd chances can run up large debt.

    One final thought, if we should change the policy to allow discharge of student loans in bankruptcy, hopefully the policy will also separate the government guarantee of that debt. As a taxpayer who paid for his three kids to go to public state-run colleges recently, I do not want have to pay for my neighbor’s kids who went to “big-name schools” on loan who could then default to the taxpayer on those loans.

  • Cathy

    Yes the two things happened.

  • http://justachat.com/forum/member.php?u=31230 Delmar Arbuthnot

    What a fantastic idea, I cannot wait to receive my first letter!