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March 15, 2007

College Loans Revisited

I tend to not be particularly impressed with student loan relief proposals. They seem politically popular, so that's good, but given the available universe of underserved groups who could be helped by redistribution, college loans seem to focus too heavily on middle and middle-upper income kids with high future earnings potential.

I'm becoming significantly more concerned, though, about their capacity to trap individuals into acquisitive life paths. If you graduate from school with a $600 monthly loan payment, you're not going to work for a non-profit. If you leave law school with a $900 monthly payment, you can't exactly decide to go off and be a writer.

This seems rather pernicious to me, and pretty poor as a social outcome. We don't want job lock. We don't want folks to be unable to change careers later in life. There's no reason to think that a 22-year-old is so wise that their decision to go to law school and assume a debt burden is a really fantastic choice, and will make them enduringly happy. They'll be able to pay off their loans, to be sure, but they'll have to be a lawyer to do so. If, at 30, they realize they should start inventing, well, that's too damn bad -- and the rest of us will never get to use their invention. And that doesn't seem optimal either for individual autonomy or economic growth.

Update: My sense is this is primarily an issue for professional school loans. I'd be interested, though, to see data on average loan burdens by education level and type. I should also say that I'm not sure subsidizing the loans is a useful corrective. This Iowa program in which employers whose employees make more than X amount have to contribute to their loan payback doesn't seem like a bad idea, though the devil would be in the details, and I worry it would hold down salaries.

Update the Second! The State 29 Blog thinks the Iowa legislation is a bad idea, though the post ends with the credibility-destroying critique:

Some business professor at the University of Iowa by the name of Jay Christensen-Szalanski created it. What does it say when some professor with a hyphenated last name who isn't British comes up with some idea that might become law? There's nothing crazier or girlymanish than a guy who takes on his wife's last name with a hyphen. The kind of people who pull that kind of crap can't think very far into the future, can they? If future generations of Christensen-Szalanskis keep the hyphenation trend going, their last name will be a lengthy morass before too long, sort of like the kind of legislation that pere Szalanski got past funnel week in the Iowa Legislature.

March 15, 2007 | Permalink


Simple solution -- have the monthly student loan payment capped at a fixed fraction of your monthly gross income, and adjust the term of the loan accordingly.

If I'm a bond lawyer, I pay back my loans over three or four years -- at $150K salary a year, I can afford to pay $30K year for four years, even if it means putting off the Infiniti, or the condo, for a while.

If I'm a school crossing guard, or a poet, $100/mo for the rest of my life, but I at least get to buy groceries.

The present system only encourages the prevalent trend in turning universities into vocational institutes. The poorer the kid, the greater the need for an immediately bankable major. Over time, classics and philosophy and other 'useless' majors will become, like the Church of England under Victoria, the exclusive preserve of the younger sons of the aristocracy.

Posted by: Davis X. Machina | Mar 15, 2007 2:50:48 PM

who graduates from school with a $600 monthly college loan payment? what, are you trying to get it all paid off in 5 years?

Posted by: rigel | Mar 15, 2007 2:51:17 PM

You've identified the primary issue. I am a nurse practitioner, and thus very aware that potentially high loan burdens discourage some students from becoming nurses. This is obviously a very bad outcome from the larger society's perspective, as we have a severe shortage of nurses. Prospective teachers face the same problem. There seems to be a tendency to blame students who go into business, law etc. as simply being "greedy," without consideration that the loan burdens may be pushing them in that direction.

Posted by: beckya57 | Mar 15, 2007 2:57:52 PM

Well, Rigel, for those like me with not all that much family support or savings, who came out of undergrad with significant loans, and didn't pay off much before going to law school, 600/mo is certainly not an absurd amount to be paying.

More generally, I think we should look at loan forgiveness programs for people who do choose less aquistive paths. My law school has one for those who go into public interest work (as I plan to), but it isn't much. Why fiddle with the interest rates, when you can actually target grants to people specifically?

Posted by: Dan | Mar 15, 2007 3:00:46 PM

Dan is right. I had $180/mo in loan payments in 1982, that's nearly $400 in 2007 dollars -- no professional school, either, just a traditional New England liberal arts BA. A JD or MD, or even an MFA, could easily ratcheted that up to the equivalent of $600 today.

Posted by: Davis X. Machina | Mar 15, 2007 3:05:21 PM

weird. i pay $100/mo for the $30k i'm carrying for my BA (no hurry), and i went to school entirely on grants and loans. for professional school i imagine that $600 isnt unreasonable even for a public school, but why are you going to professional school if youre not sure thats what you want to be doing? incidentally, all the people i know going to law school are doing so because their parents are helping support them, and they dont know what the hell else to do with a liberal arts degree.

Posted by: rigel | Mar 15, 2007 3:16:26 PM

The Iowa program you reference in your Update is a horrible idea. Why don't you read this for some reference points: http://state29.blogspot.com/2007/03/nobody-likes-hf-730-iowas-indentured.html

Posted by: State 29 | Mar 15, 2007 3:17:37 PM

"incidentally, all the people i know going to law school are doing so because their parents are helping support them, and they dont know what the hell else to do with a liberal arts degree."

This is true for my friends, too, and it's a real problem. Also: The professional school loan burden seems much greater than the college burden, though I really need to track down some data on this.

Posted by: Ezra | Mar 15, 2007 3:18:28 PM

I just finished grad school in December and am looking at a $600/month payment come June. Bleh.

Posted by: fiat lux | Mar 15, 2007 3:37:07 PM

One huge effect of these loans is that it distorts the subfields people choose in their profession - we have lots of bond lawyers (thanks for the example, Davis) instead of public service folks. We have lots of specialist doctors relative to the number of GP's. Twenty-something at non-profits typically come from money.

Posted by: ptm | Mar 15, 2007 3:39:02 PM

Continued -
Which is not to say that I'm all that strongly supportive of federal support for snooty/professional higher education. As Ezra notes, this isn't a strongly progressive economic redistribution program.

Posted by: ptm | Mar 15, 2007 3:40:52 PM

Why should the rest of society subsidize someone to the tune of a $100K so that they can go do something they might find fulfilling but where they have no realistic prospect of repaying the investment that was made in their education?

Posted by: Kevin | Mar 15, 2007 3:42:16 PM

I incurred almost $100k in debt to attend the University of Michigan Law School (in-state tuition, mind you). That was ten years ago.

My initial monthly payments were staggering. Refinancing helped lower them a bit.

Adding to the debt burden, however, my wife decided to get a PhD, rather than continue working as a chemist. So her earnings were miserable for 6 years (and don't forget the now-mandatory 2-4 post-doctoral years).

My high income supported us both during that time in a high-cost city. I had absolutely zero ability to leave my often unpleasant life as a big city lawyer. When my first kid showed up, it got even tighter.

I cannot tell you how many debt-indentured young attorneys I knew. Most of them were completely miserable. (Yes, yes, I know, there are many worse lives than being a 80-hour a week attorney in a big city firm, but that life sucks pretty bad for most healthy people, trust me.) My classmates who had less debt burden rarely stayed at those miserable jobs for more than a year or two. In sum, it seemed no one who could leave stayed at the job; anyone locked in place by high student loan debt stayed and gutted it out.

All that debt was the result of free choices, so none of us indentured servants could blame anyone else for our lot. But I did seethe when the law school called for donations, expecting me to pony up some of my salary.

To the extent schools like the University of Michigan fatten their revenues with sky-high tuitions because "that is what the market will allow", I encourage students to, in return, disavow any warm sentiment towards such schools and, more crucially, never donate another dime to such schools.

If law schools charge a market rate, they should not expect alumni to have fond memories of alma mater, any more than a mechanic who charges full price should expect donations from customers. Once schools realize higher tuition today inevitably cuts at future donations, they may reevaluate their shocking tuition increases. Nothing else seems to slow tuition's rise.

Posted by: legaldude | Mar 15, 2007 3:42:49 PM

When I went to college at 18 I was living out of my car. It was hard to get financial aid because my mother's aid for cancer treatment was considered "income." But I graduated on time with almost no student loans to repay, because I was working 20-40 hrs/week the entire time I was earning my two degrees, and 40-60 hours during the summer. I knew lots of people who partied more than I worked. Hey, no skin off my back, but their postgraduation complaints of payment plans didn't elicit much sympathy from me.

"If, at 30, they realize they should start inventing, well, that's too damn bad -- and the rest of us will never get to use their invention."

Hearing people whine about how they're "stuck" in some situation always makes me chuckle. I know lots of people who started business while working a career (including myself; sveen years out of school I have a half-dozen sources of income). Grow a pair, take some risks, proritize, and be willing to work very hard, and you can do damn near anything.

Posted by: TallDave | Mar 15, 2007 3:43:59 PM

Loan forgiveness results in perverse financial incentives.

Posted by: Patrick Donnelly | Mar 15, 2007 3:45:00 PM

Sorry, I just don't buy the basic premise here. At 22-years old, one is in fact an adult not a child, and can be expected to make adult decisions and live with the consequences, such as that borrowing large sums of money comes with the obligation to pay it back. It is absurd to ask society to pay off your debt because at age 30 (!) you decided what you wanted to be when you grew up.

Posted by: FoolsMate | Mar 15, 2007 3:50:08 PM

The student loan game is a classic case of government good intentions turning into a bad outcome. The costs for attending school has significantly outpaced inflation over the last 10 years or so (if not longer). I believe the availability of loan $$$ is one of the primary causes.

1. Government thinks more people should go to college. Noble goal. So they make more loan money available.

2. Because universities now have a larger pool of customers (students) who want and can afford their product (degree), there is no pressure to keep costs down. Hence, tuition increases significantly. I attended Arizona State in the mid/late-90's. Resident tuition was about $2K per year. This year students will pay over $4,400.

3. Customers don't complain too much about the increased tuition costs because now they can "afford" school by taking out more loans.

4. Students leave school with loads of debt and find a job market with some deflationary pressure on wages because there are so many other people out there that could afford degrees

Posted by: Gilbert_Sundevil | Mar 15, 2007 3:57:30 PM

Actually, my wife and I between us do carry $600/month in loan payments and that's after consolidation. What's pernicious about student debt is that we will pay off our student loans one month before our son goes to college. We had help from our parents which kept our debt down, but it's saddening to realize that my son will have to possibly accept $1200/month loan payments (unadjusted for inflation and the expected skyrocketing of tuition) because we will not be in a position to help him.

Like many of you, I tend not to think very highly of student loan reform proposals, mainly because they miss the larger problem: society's increasing obsession with a college education and the letters after your name. Many (I dare say most) jobs in our society do not require a college education, but the mere intelligence that is somehow signified by it. There are better ways to examine a person's relevant intelligence than by the degree they have.

Just my opinion, but a strongly held one.

Posted by: Voice of Reason | Mar 15, 2007 3:59:10 PM

I second Legaldude's sentiments. When I graduated with law and business graduate degrees, I had a monthly loan payment of over 1700 because grad school was done by loans and what little grants were available to me. Fortunately, I had done undergrad at a cal state school where I took all the Pell grants, etc. I could and forewent the loan temptations, choosing instead to live in my car and work 50+ hours a week at 3 jobs. I was able to play in bands, buy great equipment, and study hard enough to get the grades that would get me admitted to grad school if that's what I wanted to do a few years later.

I would've loved to graduate law school without debt and the freedom to go any direction, but that wasn't possible. I used the proceeds from the first condo I bought and flipped a couple years later to pay off my loans and my car loan. It felt great, but it put me back into the apartment living scenario - not that I cared.

Once you're that debt-servicing lawyer/accountant/doctor/Indian chief/whatever, forced to work the bigtime job for the requisite big bucks, the temptation toward acquisitiveness is huge. In order to be part of the scene a faire around those places, it's easy to feel like you need to spend the bucks on the proper clothes, wristwatch, car, etc., not to mention the high-priced socializing. It takes a tremendous amount of discipline to hold off and moderate one's behavior (that you have the cashflow to afford) but if you don't, you arrive at the point of having paid off the loans and "freedom", only to realize you're now locked into more mortgage/car payment/etc. than you need, and you can't make the move to what it was you wanted to do anymore, because you've grown too accustomed to the high material standard of living.

But like others here already said, every choice has consequences. The marketing myth/idea that in our society "you really CAN have it all!" is something that isn't put under a harsh light enough, such that many younger inexperienced people come into the job market actually believing it. And thus, years later, GM sells lots of red Corvettes to ameliorate the resulting mid-life crises...

Posted by: vincenzo | Mar 15, 2007 4:20:16 PM

The very need for student loan forgiveness is evidence of the unintended consequences of heavily subsidizing college and professional school education. When you subsidize the consumption of a good or service, you minimize or eliminate the need for the producer to keep costs down. While liberals are incensed about Exxon's 10% profit margins, they look the other way at higher education costs that have risen at three or four times the rate of inflation over the last thirty years. Instead of worrying about how much CEO's are paid, how about using the power of the state to impose caps on the cost of education? That wouldn't solve the problem either, but it would give liberal academics a life lesson about the ineffectiveness of price controls.

Having said that, however, it is a real problem for our society if obtaining an education, especially a professional degree, necessitates a career in the highest paying field as opposed to others that don't pay as well, but confer benefit on society.

Posted by: jt007 | Mar 15, 2007 4:20:34 PM

Government decides more people should attend college, so they hand out large amounts of debt to individuals with little credit history or collateral. Students take the money with glee, some with a feeling of entitlement.
Many sour towards the commitment and discover that there is indeed a downside to debt. Some even say they should not have to pay it back, long after all the money has been spent.
Some of these posters talk about the dedication and commitment that they have put into honouring their debts. I applaud these people.
To the others that want to declare that we should take their word that we would be better off if we allow them to default on their debt, so that they can become inventors and public servants - why should we believe you now? You want to break a previous commitment you made to paying back a loan. There is no virtue in spending other peoples' money and never paying it back, no matter how you spin it.

Posted by: SF | Mar 15, 2007 4:27:52 PM

You cannot be serious! Tuition is already heavily subsidized at the selective universities, net of loans. Salaries at non-profits are effectively subsidized by their endowments. What do "we" have a shortage of: non-profits, writers, or scientists and engineers? Sorry, but it sounds like you're saying "subsidize me."

Posted by: John F. | Mar 15, 2007 4:32:52 PM

I totally agree with Gilbert_Sundevil. The main problem is the spiraling cost of university and the mandatory degree. You have to get a degree to get a good job (compared to the pre-Boomer 50s when all you needed was a high school diploma [really college is the new HS, graduate school is the new college]) and universities start to charge monopoly rates. We could halt the out of control university costs by killing off government loans for university. The government threatened just that with military recruiting on campus (no recruiters == no loans) and look how quick the universities knuckled under.
I also want to point out Gilbert ASU is very very cheap. My company paid $80k for me to go to a 3rd tier law school. Whereas had I been willing to quit work & more importantly break up with my girlfriend/wife, I could gone have to ASU, a 1st tier non-Ivy League school, for $10k. (all values are end-to-end totals w/o housing)

I also agree with FoolsMate & TallDave. By university, especially graduate school, you are an adult. Maybe you should take responsibility like one?
A lot of these career choices you want to make don't require degrees. Why are you wasting $100k in a private school to become overqualified? I love history but I wasn't willing to pay to get a degree in it. It is called a hobby. You should make some intelligent bets about how you are going to live your life (what will be your work & what will be your hobby) and make your money and spend accordingly.
Yes, I would have much rather gone to ASU than Green Party U, for my law degree, but ASU would have left me with NEGATIVE $10k whereas Green Party U, with my company paying me a salary, GENERATED $180k, a net difference of nearly $200k. It was tough work going to night school but I got a degree for nothing but sweat (and a burning resentment of a certain political persuasion ... to think I used to be center-left).
Choose wisely. Both your degree and university. It is little different than complaining about paying a mortgage on a McMansion versus a starter home bungalow.

Posted by: EvilDave | Mar 15, 2007 4:33:15 PM

This is dumb. It places the employer in the middle for no good reason.

If the state wants to give taxpayer money to college graduates who stay in the state, then why doesn't the state just send the money directly to the kid? Why complicate it by mandating the employer pay it first?

And FYI in the real world where the laws of economics apply, this program will dissuade employers from choosing the job applicant who has college debt.

Posted by: aj lynch | Mar 15, 2007 4:35:32 PM


Posted by: Al | Mar 15, 2007 4:40:12 PM

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