Student Loans: A Call for Creative Solutions

Universities raise tuition faster than the vast majority can afford. That leads to more government grants and government and private loans, which flow to universities. They then construct lovely new buildings, largely on the backs of taxpayers and deeply hocked students. Something has to give.

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U.S. Education Secretary Arne Duncan has urged more creative thinking to help solve the student debt crisis.

Rising college costs and soaring student debt are front and center like never before—and it’s about time. Outstanding student loans are approaching $1 trillion, more than even credit cards. The average graduate leaves campus with some $25,000 in loans. Many owe much more than that, and in a weak job market they have little chance of finding a paycheck big enough to pay down their debts.

Student loans can quickly become a drag on a new grad’s life, and on the economy too, as these young people struggle to pay interest bills when they might instead be buying cars and furniture. The Class of 2011 is about to taste this new reality; their first loan payments come due in the next 60 days. Happy holidays.

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The growing furor over student debt has found voice in the Occupy movement, which is asking for zero-interest loans and debt forgiveness. Meanwhile, at a recent conference of college financial aid officers, U.S. Education Secretary Arne Duncan urged the industry to “think more creatively, and with much greater urgency.” He hopes to ignite a national conversation about what is now a financial crisis-in-waiting.

The White House is well aware of the issues. In a recent financial education session with President Obama, the President’s Advisory Council on Financial Capability presented a working draft of 20 key money concepts that young people should understand. Prominent among those was one about the high cost of college relative to what a student is likely to earn upon graduation.

According to Duncan, three out of four Americans now believe college is unaffordable for most people. Among young adults, three out of four believe that graduates today have more debt than they can manage.

Something has to give. The cost of going to college rose 5.4% last year, well ahead of inflation—a trend that has been in place for many decades. The drumbeat of outsized tuition hikes have overwhelmed personal income and sucked up every incremental penny of federal aid. Patrick M. Callan, president of the Higher Education Policy Institute, told The New York Times:

“I’m glad to see the administration use the bully pulpit. … We’ve put huge amounts into Pell grants under Clinton, Bush and Obama, but the money that went to financial aid has been absorbed by tuition increases. And with all that we’ve invested, we have a less affordable system than we had a decade ago. We’re on a national treadmill.”

That can’t be a good thing. In effect, we have a cycle where universities raise tuition faster than the vast majority can afford. That leads to more and more government grants and loans, which flow to universities. They then construct lovely new buildings, largely on the backs of taxpayers and deeply hocked students.

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It’s hard to blame the students. They’ve been told that a college degree is worth $1 million in additional earnings over their lifetime. But the cycle has to stop somewhere, probably with the families that do all the borrowing. As the President’s Advisory Council seems to want to make clear: Most kids shouldn’t borrow heavily for a pricey private-school degree in, say, French literature; odds are the debt will prove suffocating with a major that doesn’t pay much at first, if at all.

The emerging student loan crisis looks a bit like the formative years of the housing bust, when people chasing the dream of home ownership grabbed loans they could not afford. The lesson: Just because a lender has money for you doesn’t mean you should take it. You have to give some thought to what your life will look like after graduation—and consider a lower-cost education (in state, part-time, some community college credits) that still leaves you with the degree you want.

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