This week, President Obama signed an executive order to extend the Pay As You Earn debt relief program for Americans burdened with college loans. But this can't be a long term solution to the problem of soaring college costs, which have far outpaced inflation in recent years and have risen almost 1300 percent since the early 80s.
Signing the bill, which extended the four-year-old Pay As You Earn initiative, Obama described education as "the single best investment you can make in your future." That may be true. But it's still a pretty dangerous investment if it comes with shackling yourself to massive amounts of debt that you can't even discharge in bankruptcy.
The expanded program is fairly limited in scope. It will lower monthly payments to 10 percent of a borrower’s after-tax income for the up to five million students who received federal student loans for the first time between 2008 and 2011. Borrowers who graduated before 2008 and those who graduated after 2012 already had access to a similar program, which limits student payments to 15 percent of income.
This kind of remedy is incommensurate with the problem. Student debt is the fastest-growing category of debt, ballooning at a staggering and unsustainable 7.8 percent per year, far above both the 2.2 percent growth rate for the wider U.S. economy and the 1.58 percent growth rate for median incomes. And there is already around $1.1 trillion in outstanding student loans in the U.S., or $29,000 per borrower.
Programs like the president's are designed to take the sting out of soaring levels of debt. If the repayment amount is capped at an affordable proportion of the borrower's income, then the he or she should be less likely to run into financial difficulties, and default. The delinquency rate for student loans is currently running at 11 percent, and has risen rapidly in recent years. Capping repayments should help somewhat, but the measures don't help those with outstanding debt owed to private banks — students currently owe $150 billion in private student loan debt — rather than the federal government.
Critics argue that such programs also don't address the root cause of the debt: the skyrocketing price of college. And I agree. Capping debt repayments — and even, as Senator Elizabeth Warren (D-Mass.) is aiming for, significantly lowering interest rates — is nothing more than placing a bandage over the festering wound of soaring tuition and textbook costs. It may limit further damage in the short term, but it can't be seen as a long-term solution.
Colleges exist to satisfy the massive and consistent demand for education and skills. People want jobs, and employers demand qualifications to prove competence, which colleges provide. But would the rising fees that colleges have managed to extract have been sustainable without federal loans and loan guarantees? I highly doubt it. Without loans, students don't have access to the kind of money required to pay the rising and rising costs that colleges are extracting.
As I see it, the government has two real long run options.
The most obvious one is that the government could regulate colleges that receive tuition fees from federal student loans — capping their tuition fees, capping textbook costs, and demanding that colleges spend a certain threshold of tuition fees (say, 80 percent) on tuition costs and not on extortionate administrator salaries, luxury dorms, sporting facilities, art galleries, or other boondoggles.
In addition, the government could help set up new institutions to compete against the current crop of colleges to satisfy the market demand for education. If new competitors offer high-quality education for a lower price, then colleges would find it much harder to hike prices as students seeking to avoid debt flock to cheaper colleges.
Ways to achieve this could include seeding a system of federally-run universities — something the federal government currently lacks. While federally-run institutions may be getting a bad rap in the wake of the VA scandal, countries including Britain, Japan, and Germany maintain public universities, some of which including Oxford and Cambridge are world-leading institutions. Of course, with Congress deadlocked and budget-cutters still running wild, it would probably be impossible in the short term to found an array of high-quality, nation-wide campuses.
That's why the best way forward is probably for the government to fund and formalize completely new kinds of educational institutions like MOOCs — massive open online courses where students study online, and in their own time. The difficulty with MOOCs is validating this kind of learning. But perhaps federally-run MOOCs with a standardized exam would solve that problem.
Now, some will point out that the government's track record in web design has been rather shoddy recently. But I'd counter that if state-level governments could found some of world's finest higher education institutions, like the University of California last century, why can't the feds this century?
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