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Student Loan Debt: Searching for Answers

Student Loan Debt: Searching for Answers

Walking into the “Public Talk and Q&A With Loretta Mester” hosted by NYU Stern’s Center for Global Economy and Business, I expected the focus of the discussion to be on monetary policy. Mester is the President and CEO of the Federal Reserve Bank of Cleveland. Considering that she has been quoted on many occasions as pushing for rate hikes, I anticipated a prolonged discussion about the federal funds rate. In a surprising twist, and much to the chagrin of the MBA students lining the room, Mester dedicated only a few, fleeting moments to inflation target and interest rates. Instead, she chose to focus on what she deemed a “structural problem”: education policy in the United States.

Specifically, she focused on student debt, a universal problem shared by students at private institutions--such as NYU--and public institutions alike. Mester started with the startling statistic that in 2004, roughly 25% of 25-year-olds had student debt, while in 2014, that number has ballooned to 45%. In fact, a series of interactive charts produced by the NY Fed provide further context, breaking down debt and loan delinquency rates by age group.

According to the College Board, “about 60% of students who earned bachelor’s degrees in 2012 and 2013 from the public and private nonprofit institutions at which they began their studies graduated with debt. They borrowed an average of $27,300.” The increase, when compared to the 1999-2000 cumulative debt average value of $21,200, represents a 21% increase in average cumulative student loan debt per borrower, and a 33% increase in student loan debt per bachelors degree recipient over a 13-year period. Perhaps this differential between bachelor’s degree recipients and overall borrowers reflects national 5-year graduation rates—which are currently only at 55% nationwide. 

Despite these costs, Mester brought attention to the fact that the “skill premium,” or increase in income due to possession of a college degree, continues to rise. According to the Cleveland Federal Reserve, “college degree holders enjoy an 84% increase in earnings” when compared to high-school educated students.

From Mester’s comments, and other literature on this subject, it is clear that a college education is highly valued in the marketplace; yet, due to high tuition rates, the return on this investment still remains very low, or even negative, for many students. The Economist analyzed the return on investment (ROI) for various different college degrees, and the results were bleak. Comparing the investment in college to investing 20-year treasury notes (the lowest yield instrument), they found that engineering degrees regularly generated a high, positive return, while 46 of the 153 arts degrees studied generated a lower return than treasury notes. Of these 46, 18 degrees generated a negative return. According to this study, school reputation also matters a lot in determining the ROI of their arts degrees.

Reading these articles brought to mind an article by a Stanford University professor, which encourages students to exercise “moral courage” when choosing their career paths, rather than choosing the roads oft travelled (banking, consulting, etc.)

I, too, would like to see more people choosing to follow their dreams and passions, wherever they may lie. But for most, choosing a career path is another example of constrained optimization. Perhaps choosing to go into banking has less to do with a “fear of indulgence” and more to do with the piles of student loan debt with which this generation is faced. And, essentially, this article seems to leave out the immediate advantage that students going to an elite institution like Stanford have over other students when it comes to receiving a high ROI on a large variety of degrees.

So the question we should be asking is: why is tuition so high? Economists have differing viewpoints-- so much so that the Washington Post devoted a 10-part series to the subject. Some people might point to subsidies, while others may point to decreasing overall endowments, and still others might mention high administrative costs at universities.

While parsing out these individual impacts may be tough, what remains clear is that something must be done to make college more affordable. Mester emphasized the importance of restructuring the federal loan system. As much as I realize that doing so would be an enormous public policy challenge, I worry that the failure to do so will force students to default on loans, spend most of their adult lives paying for them, make career choices solely based on pay grade, or worse, seek out potentially riskier alternative forms of funding.

Ultimately, the call for college affordability reform comes from more than just a place of moral indignation. As low-to-middle skill jobs are becoming increasingly automated, education is going to be key in ensuring longer-term economic growth.

The good news is that politicians have surely taken note of this fact: President Obama has pushed for free community college education and presidential nominees have discussed the issue at length in their campaigns and debates. Hopefully this issue can transcend rhetoric and politics, and find itself on the long road towards action.

- Bhargavi Ganesh

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