By Jeffrey Dorfman
The total of all student loan debt just hit $1.5 trillion, so prepare for a slew of stories telling you how student loan debt is out-of-control and we must reform the program to avoid a crisis.
Ignore the hype. The reality is that most borrowers are using student loans responsibly, graduate with a perfectly reasonable amount of debt, and are making a smart investment.
Given the excellent return on investment from college educations, why is society acting like student loan debt is a problem? Instead, we should be glad so many people are acting in a way that will make the country better off in the long run.
Since the start of the 2007-2009 recession, the federal government has run enormous budget deficits. While the value of this borrowing and the accompanying spending has been of questionable value, many economists on the left have stressed how smart such behavior is.
Former Treasury Secretary Larry Summers penned a great example of the genre back in 2012, encouraging countries with access to low-cost money to borrow heavily and long-term for a variety of uses. Anything with a rate of return or reduction in costs greater than the cost of funds should be pursued using borrowed funds.
A college education is considered one of the best investments a person can make. As reported by Kaitlin Mulhere in Time, national data collected by PayScale shows that, after accounting for financial aid, tuition and other costs of attendance, and the four-year delay in starting full-time work, the average college pays off in $280,000 in higher earnings over the 20 years after graduation.
Given that college costs are accounted for and that $280,000 is the average net gain, it is clear that the return on investing in a college education is quite large.
If we apply the same logic to college attendance as to government deficit spending, people borrowing at low rates to obtain a college degree are making a smart investment. Why are liberals so obsessed with forgiving student loan debt, making college free going forward, and other policies that reduce the cost of higher education for its beneficiaries? After all, the students borrowing (at government-subsidized rates) to invest in a better future are simply following the identical strategy those same liberals insist is smart when the government follows it.
The problem surely isn’t the responsibility of the borrowers involved. The federal government has run up a national debt equal to roughly $60,000 per person, while the average student loan borrower graduating in 2017 only owes $39,000. Further, the median debt value is much lower and borrowers from earlier years owe less than more recent graduates. The average student loan payment is less than the average car payment. Considering that cars depreciate rather quickly while education will deliver higher earnings for one’s entire lifetime, why is there a crisis caused by people making smart, responsible, and rational decisions?
A small number of students do borrow more money than the degrees they pursue are likely to allow them to pay off. There are real concerns over students who borrow and do not complete their degrees or attend certain for-profit schools that more or less exist to collect student loan-funded tuition and do not provide much useful education in exchange. Yet, these are small and manageable problems that should be addressed with reform, not a reason to condemn the total amount of student loan borrowing.
What’s good for the goose is good for the gander. If borrowing money is smart when the rate of return is higher than the cost of the funds when the federal government does it, it is smart when ordinary Americans do it to obtain a college education. Liberals cannot have it both ways. If student loan debt of $1.5 trillion is a national crisis, the $20 trillion national debt must be a crisis of unimaginable proportions.
Jeffrey Dorfman is a professor of economics at the University of Georgia, Senior Fellow at the Georgia Public Policy Foundation and author of the e-book, “Ending the Era of the Free Lunch.” This column was published in Forbes magazine and is reprinted with permission. The Foundation is an independent, nonprofit think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (May 18, 2018). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.