We’re thinking about the student debt crisis all wrong

Today is the first day of the rest of your life paying off your student loans.
Today is the first day of the rest of your life paying off your student loans.
Image: Reuters/Brian Snyder
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There’s a rousing call in the US to cancel student-loan debt, and to effectively blow up our current system in its entirety.

The issue was taken to Capitol Hill this week, where advocates for better borrower protection made their case before the House Financial Services Committee to debate what to do about this $1.6 trillion problem.

But there’s no such thing as a student loan crisis without its root cause: the college tuition crisis.

Comedian Hasan Minhaj, who was among the advocates attending the hearing, asked, “Why can’t we treat our student borrowers the way we treat our banks?”

That’s a fair question. In the last 30 years, tuition costs at public universities have increased by 213%. Among US News-ranked private institutions, more than 100 private colleges now charge at least $50,000 for tuition.

If the cost of tuition wasn’t constantly creeping up, our student loan balances wouldn’t increase. And thanks to the current student loan system, colleges and universities have little to no incentive to curb tuition costs.

When Minhaj had his live audience polled during a recent episode of his political comedy series that covered the crisis, he counted more-than $6 million in student-loan debt among his audience members. During the hearing this week, representative Alexandria Ocasio-Cortez revealed the amount of her own student debt. At around $20,000, it’s actually less than the national average. And when you weigh it against the $174,000 salary of a rank-and-file member of Congress, AOC’s return on investment probably doesn’t sound that bad to a lot of college graduates.

But that’s not the case for every American college graduate, many of whom are fighting to keep from drowning in interest payments.

We need a change

The government essentially serves as an ATM for colleges and universities by paying whatever the institution asks for tuition. Fees are transferred to the student in the form of interest-bearing debt, and in the case of defaulted loans, to the American taxpayer.

What compounds this issue is that universities are producing uneven outcomes for students once they graduate. Some students are able to land jobs after graduation with salaries that justify the monthly student loan payments, but others are not able to do so, rendering their student loans a particularly heavy burden.

This is exacerbated when you compare return on investment for the cost of degrees in computer science, for example, where average salaries are relatively high, to degrees in the arts where the majority of professionals earn less.

After averaging the college tuition costs paid by the 60 members of the committee and adjusting for inflation Minhaj surmised that the members had only paid $11,690 a year in tuition costs, some 30 years ago.

“Today, the average tuition at all of your same schools is almost $25,000. That’s a 110% increase over a period of time when wages have gone up only 16%,” he said.

We encouraged millions of students to go to college, and then we sent them into the workforce, without ever giving them the information they needed to make the right decision. For some, the American Dream has buckled under the weight of this increasingly historic burden.

“You see what’s happened? We’ve put up a paywall to the middle class,” said Minhaj.

If we want to solve the debt problem, we need to be honest and address its source: the rising cost of tuition.

So, how do we better align incentives in a way that creates a system capable of preparing college graduates—en masse—for the workforce, without being overly indebted upon entering it?

One really easy place to start is for institutions to be more transparent with students and families, so they can make better decisions about where to go to school.

In other words: Give consumers more power.

Ask the questions

There are three very specific—and simple—pieces of information that would lead students and their families to make significantly better decisions about where to go to school. But they need to be made readily available. In turn, access to this information would hold colleges and universities more accountable for their costs upon entry, as well as outcomes for students post-graduation.

As ranking Republican Rep. Patrick McHenry stated at the hearing, “This is a crisis, but it is a crisis that the government created.” The government needs to help fix it by requiring easy access to the answers to these questions:

  1. How much does it cost to go to this school?

This sounds like an obvious one, but admissions personnel rarely address this question fully. When a college extends an acceptance offer to a student, there are discrepancies in how various terms of cost are used.

A study by the New America think tank found that over a third of colleges and universities did not include any information about the total cost of attendance on their award letters.

In addition, 70% of colleges surveyed grouped all aid together, making it seem like there were no fundamental differences between scholarships on the one hand (free money) and student loans on the other (financing with an interest rate).

Uniform presentation of this information across all colleges would make for a more streamlined consumer experience, helping students and parents make better informed decisions on how much needs to be taken out in loans and what their financing options are.

  1. If I need a loan, how much will I pay per month after I graduate?

It needs to be made very clear to students what they will be paying in student loans every month upon graduation—before even taking out that loan to begin with.

Astoundingly, the vast majority of Americans have no idea what their monthly student loan payment is, or how long it will take them to pay back their loans. Stories abound of graduates who never knew or didn’t realize how much they’d have to pay every month after graduating.

Schools are in a unique position to deliver this information to students and families, right at the time when they make the decision to sign on the dotted line. School financial aid offices have up-to-date information on students’ federal student loans. And private lenders have pre-established pipes into college financial aid offices, through which this information can be easily shared.

  1. What do other graduates from my school—and my major—make every month once they graduate?

College and university acceptance letters should include the average monthly starting salary for graduates of that school within the student’s intended major. This information, in combination with total cost and monthly student loan payments upon graduation, will provide students and families with clarity about their true indebtedness upon graduation—and whether they can actually afford to take out that loan or go to that school.

The fact remains that not every four-year degree from every higher education institution actually helps students make a higher salary than they would with just a high school diploma, a GED or an associate degree.

A recent study polled 1,000 undergraduates across all majors and found that average expected annual salary was $57,964 in their first jobs after college, when in fact the average salary for a college graduate is $47,000. That means our college students overall are expecting to be paid 23% more than they will get when they first join the workforce.

Many colleges already have data on expected outcomes through alumni surveys conducted by their development offices. Revealingly, it tends to be business schools that share this information most consistently, where accountability to career outcomes is inherently high, creating a natural incentive for schools to publish the information. The better the numbers, the higher the applicant demand, the more revenue an institution will be able to earn.

There’s no reason the government can’t collect this data in a relatively robust way. We all know that the Treasury Department collects our incomes every year, and the Education Department knows where most of us went to school through the federal student loan program, so why not combine these two data sources in an anonymized fashion, by institution, so that the right information can get to prospective students before they make a significant financial and life decision?

If universities clearly and consistently offer these three pieces of information, students and their families will be able to better understand their debt, relative to their income, upon graduation.

This knowledge would allow students and families today to determine which colleges—and the career outcomes they actually lead to—make the most sense for their tomorrow.

The universities that charge more than is justified by students’ post-graduate outcomes would be forced to decrease tuition, or drive stronger job placement and salaries for their graduates. Or both.

Some universities propped up by our broken system might even have to close down entirely.

That’s wouldn’t be a bad thing. Markets only truly work to drive the outcomes we want if there is transparency around the right information. In this instance, transparency would lead to fairer tuition rates or better career placement—either or both of which would lead to a significant reduction in over-indebted college grads in the US.

Sometimes the best solutions are the simplest ones.