The Real Student Loan Debt Problem
An Article recently published by the International Business Times explored the potential
for problems associated with aggregate student loan debt. Since the total student loan
debt outstanding exceeds $1 Trillion dollars, the scope of the problem seems immense.
When complicated by the 30% of student loans that are 30 or more days overdue, there
appears to be a crisis brewing.
The concern expressed by many is that the burden of student loan debt will suppress
people's future disposable income. To many, this presents a dire scenario where future
consumption spending cannot keep growing due to the crushing burden of student loans.
It is complicated by the high rate of unemployment among recent college graduates, and
has led many to believe that government action is required to "fix" the problem.
The Solution that Isn't a Solution
When college students gather in protest rallies, they frequently hold up signs demanding
that their student loan debt be forgiven. Since the overwhelming majority of student loans
are underwritten by the US government, all that this would accomplish (besides
delivering a free ride to people who acted irresponsibly) is to turn $1 Trillion of private
debt into $1 Trillion of public debt. This sounds great for people that are either looking
for a handout or looking to buy votes by giving away a handout with government money,
but it does nothing to solve the underlying problem.
By accelerating the government debt problem, it accelerates the extent to which drastic
action must be taken. Many (mistakenly) think that the pile of student loan debt can be
dissipated with additional taxes on the wealthy.
Unfortunately, this strategy has two main deficiencies. The first is that there aren't
enough wealthy people to pay the taxes. The second is that most wealthy people hire
lawyers and accountants to reduce their tax burden with (legal) income sheltering
strategies. The ultimate result is that the government is unable to tax away its debt and
will need to inflate the currency. Since inflation disproportionately impacts the poor and
middle class, it will ultimately end up coming back to bite the people who were holding
the signs demanding that the government wipe away their student loans.
The Real Problem
A paper recently published by Georgetown University breaks down the average earnings
and unemployment rates for college graduates based on the level of education and course
of study. It comes as no surprise that subjects such as education, business, and
engineering all have relatively low rates of unemployment associated with them and
respectable earnings. However, studies in subjects such as social sciences and the liberal
arts have very high rates of unemployment and relatively low earnings.
Thus, the real problem is not that people carry so much student loan debt, but that people
have chosen to take out large amounts of debt to finance an education that does not have
a significant market value. Another way of stating the situation is that people who study
subjects like engineering and business do not have a student loan problem. The reason is
because their education prepares them for a career that allows them to generate an income
so that their debts can be paid off.
The Real Solution
Understanding the real problem is the first step toward a real solution. The only way for
this lingering problem to be solved is for the people who are under all of this debt to
become gainfully employed so that they can pay their debt back. However, attaining
gainful employment requires that better decisions be made in regard to the course of
study that one pursues in their path of higher education. This is the only method of
dealing with this problem that will not result in a simple transfer of the burden to
The truth is that all choices involve cost. The decision to attend college is frequently very
wise. However, it is highly important to choose a course of study that is consistent with
your long-term career interests. Studying the arts is fine if you are content with living the
life of an artist. However, if you desire to climb the income ladder, then you must acquire
skills that will allow you to generate value for an employer that are sufficient to justify a
favorable level of compensation.
Student loan debt is not fundamentally different from any other kind of debt. It is not
good or bad in and of itself... student loans taken out to acquire skills that allow you to
earn a good income to support your family are a very wise decisions. Loans taken out to
finance four years of partying a degree that offers no employment prospects are much
more suspicious. All debt is fundamentally neutral in nature. It only becomes good or bad
when paired with an investment that is good or bad.
Thus, the answer is for more people to make better decisions regarding what they study.
In the larger context, the investments of time, money, and education we make are what
will define whether any resources we borrow to make those investments were wisely
deployed. Instead of demanding that other people bail us out after making bad decisions,
we should take the opportunity to make better decisions in the future. Each day is a new
chance for us to learn. We should seize those learning opportunities to make each
successive day more prosperous than the last.
Douglas J Utberg, MBA