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Main | A mid-Summers dream »

"Sweeping changes" in student loan bill really lock-in more of the same in financing a college degree

In the September 18 issue of the Wall Street Journal, it was reported that with the House approval of an education-financing bill recently, changes are underway to change the way student college loans are made, cutting-out private lenders and the federal government as the sole source of student loans. 

While it seems appealing to some to eliminate greedy private bankers—and the prospects of a proposed $87M in savings being re-directed to low-income students and minorities—the real issue is the failure of Congress to re-think the way financing of college degrees occur in the first place.

To begin with, the costs to students of a college degree today is a lot money.  Whether a public or private institution, college represents a major expenditure for most Americans.  Today, the annual expenditure for it represents an enormous before-tax proportion of household income, in the range of 30% to 70%--annually, depending on whether the institution is public or private!

Nonetheless, getting a college degree, however, represents--in strictly economic terms--a very good deal.  Over a working lifetime of 40 years, college grads will, on average, earn roughly $1M over that earned by high school degree holders.  When one considers the payout from a college degree in some specialized fields—business, engineering, technology—differences are even more dramatic.  Adjusted for these financial increases in day’s terms, the earning power of the average bachelors degree is about $400,000, while the net present costs is $150,000—a whopping quarter of a million dollars gain for having acquired a college diploma. 

Furthermore, a bachelors degree substantially hikes the odds for post-college gains of graduates, irrespective of whether the individual studies at an elite school or not:  A student’s chances of earning income in the top 20% of the population increase five-fold for low income family students, over three fold for students from middle-income backgrounds, and over two-fold for students from families making over $82,000. 

The problem with the current proposal in Congress is very simple—it continues the old and out-dated idea, namely that a high-cost-but-long-term benefit like college effectively must be paid-for with what amounts to short-term financing.  As a society, we don’t do this with the procurement of other, major, long-lived benefits--an obvious example being the purchase of one’s home.  Considering the span of an entire post-college career, asking students to finance with relatively short-term borrowing for what is a long-term benefit transaction is problematic for two reasons. 

First, it places a financial burden, however reasonable and prudent the decision may be to acquire a college degree in the first place, on young adults at the period of their early careers when they are least prepared—income-wise—to handle and repay a substantial loan.  Second, it makes much more sense to spread the costs of financing a worthy “investment” over the useful lifetime of the economic benefits incurred!  Final passage of the current House bill all but assures a prolonged continuation of the old system of unrealistically bunching the burden to students at a time when they are least able and prepared to repay a smart choice for themselves and society. 

A college degree is nothing more than a sound, economically savvy decision for the individual to make and society to encourage and facilitate.  What is missing in the U.S. college marketplace today are the financial mechanisms which make that investment transaction occur with relative ease and rationality.  What’s needed, instead of more traditional government or bank financing, is a better societal mechanism to pay for the reasonable cost of making a prudent investment in oneself by attending college. 

Too many families today are forced to refinance their homes, pay with credit cards, dip into precious retirement savings—all to make it possible for sons and daughters to take advantage of what is prima facie a very attractive value proposition.  Typically, these same families can, over a reasonably long period of time, finance cars, homes, vacation properties, boats--but not a college degree; yet, a college degree likely represents the single best investment to be made by long-term financing! 

Perfectly viable-but-different solutions have been around for a long time, yet pose a drastic change in the college financing model.  One is that after a successful, and largely self-funded, freshman year, college students could “borrow” government funds for all or a substantial proportion of the costs of any college they choose for the balance of their programs.  Upon graduating, each grad would be required to pay a small percent of their annual incomes [say, one or two-percent] for the remainder of their productive working lives via their IRS 1040 income tax returns every year on tax day.  In the long run the plan would pay-back the federal government for fronting the money and replenish the advance fund for students who follow; such an approach to college financing could cut-out cumbersome bureaucracy as well!  Recently, former Secretary of Commerce, Robert Reich has also proposed a plan of similar design and concept. 

The real issue with the current House-passed bill is that it really represents no change at all—and locks students into very poor ways to handle what otherwise is a prudent, sound choice.  Its passage represents a failure to create the appropriate mechanisms already erected and sustained for other types of high-cost, high-value purchases—indeed a way that would make the necessary means available to all who desire and merit the considerable benefits and value of a college degree to get exactly what they need and deserve.  


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