The headlines have been screaming. Money struck the repetitive chord: “Why the Student Loan Crisis is Even Worse Than People Think.” Recently, and more hopefully, my attention was drawn to a headline in The Sunday Star, “Dam the debt helps at Washington College.” But, let’s begin with the back story.
It is widely reported that students owe approximately $1.3 trillion in college debt and it is estimated that 7 million borrowers are in default. Indeed, the government garnishes Social Security benefits (retirement and disability) to recover loan amounts and the Wall Street Journal noted that 7 million Americans age 50 and older owed about $205 billion in student debt in 2015. Unfortunately, this story is not unfathomable; we have seen what happens when the government gets into the middle of lending.
The college dividend has become an article of faith. Avoiding bothersome detail, writers and speakers state that the benefits of a college education far outweigh the costs. Some politicians have become so enamored they propose free degrees.
Predictably, the government has seized the day and emotions have overwhelmed numbers or just plain good sense. In a market-based loan transaction, risk is priced in the cost of the loan and generally the riskiest borrowers are denied or priced out of the market. When risk assessment is minimized by government mandates and subsidies, somebody has to pick up the defaults. We all remember the Great Recession of 2008 and who picked up a defaulting economy.
One crystal clear voice striving to help America out of the debt mire, both before and after the financial meltdown, was Sheila Bair, who served as Chairperson of the US Federal Deposit Insurance Corporation from June of 2006 to July of 2011. Ms. Bair is now the President of Washington College.
President Bair has begun several programs at the College to help students who must borrow, attend college and reduce debt. One program, the aptly named Dam the Debt, recognizes a first principle: success turns on hard work and should be rewarded. Dam the Debt encourages students to finish college; a number of graduating seniors, who have received federal loan subsidies, have had their debts reduced through a grant from the College. Bair raised a fund for this purpose. In a Market Watch article, Bair observed, “Why does a scholarship only have to be at the front end?”
There is indeed a student debt crisis. In the last year, President Obama’s approach to the crisis has been to come up with various ways that debt can be forgiven or reduced. Predictably, those who have paid or are paying their loans are angry.
When the government loans or subsidizes loans, risk must be in the equation. If there is an especially compelling case for helping high-risk students, then some form of scholarship (perhaps followed by a success warranted loan) is a better option. And, for students who have no option but to take on significant levels of debt, programs like Dam the Debt should be started. In short, those who work hard and successfully should be rewarded.
I suspect if statistics on personal income were organized around levels of effort rather than age or income, it would become clear that individuals who work hard are the best loan risks. And, I suspect that a significant percentage of those who earn more over their careers will have taken advantage of educational opportunities that align with their interests. Persons who do not follow the conventional college track should not be implicitly assigned to some inferior class.
One more thought on educational resources and their use. Malcolm Gladwell, an insightful journalist and author, points to how, despite a collective endowment of close to $140 billion, the Ivy League colleges plus Stanford serve just slightly more than 11,000 low-income students at any given time.
Many of those who have graduated from the top colleges direct their gifts and their children’s enrollment to their alma mater. Relatedly, studies have shown that less than 2% of incoming freshmen make it into the top twenty colleges and universities. Hopefully innovators, like Sheila Bair, will create programs and attract donations that reward those among the 98 percent who work hard and whose only hardship is beginning college with scant resources.
Al Sikes is the former Chair of the Federal Communications Commission under George H.W. Bush. Al recently published Culture Leads Leaders Follow published by Koehler Books.