Plenty of students are defaulting on their student loans, a worrisome problem that should make us reconsider the value of a four-year college degree.
I would like to preface my thoughts on how more skills training might improve returns on education with a short departure into student loans. Unemployment is probably behind the high rate of student loan defaults and deferrals. It could also reflect the changing economy. Either way, we have a problem. We are encouraging students to pursue college degrees, even though many have to borrow to finance that opportunity. The payoff, for many, never comes. They are left with debt that changes the course of their adult life.
Lenders are ready to turn off the spigot of student loan debt. High default rates on student loans might underscore the need for better underwriting. Banks are sure to make good on that fact. Indeed, new data contradicts the idea that student loans are a poor fit for risk-based pricing. Even these loans can be adequately gauged for performance with credit scoring. A new study says that a 670 credit score seems to mark the difference between making good on private student loans or not. For borrowers with credit scores above 670, only 1.8 percent failed to pay their debt. Below that number, and the default rate soars to 16.8 percent.
That is pretty powerful data, and it contradicts doubts about credit scoring for these products. Many students seek loans at a point in their life when they have little or no credit history.
Accepting that, what does this tell us about how and why we promote college? A government economist thinks it might be worth a million dollars. The College Board concedes that it is somewhat less valuable. In many instances, all of that school appears to be worthless.
Banks may make the decision for us. Lenders, particularly private student loan companies, could
turn off access to college to students with poor credit. Some try to underwrite according to degree - English majors are poor candidates for a loan, while lawyers and MBAs are a better bet. Call it degree-based pricing. Stricter credit is coming, though. It doesn't seem like this conclusion could be avoided with data like the numbers above. Yet to do that would have substantial impacts on exactly the kinds of students whose hopes for school stand to possibly reverse the course of their families and the generations of poverty that they have experienced. Then we'd all be caught flat-footed with a goal (college) that can't be achieved because too many students can't afford to pay for its costs.
I think we should move more students to two-year programs. There are problems with the four-year degree. Studying the liberal arts is nice, but it is becoming more and more of a privilege of the rich to spend $150,000 reading Milton. That is why so many people have to follow four years of college with two more years getting a master's degree.
Maybe college should be more narrowly focused on the best students. Robert Samuelson said that we have a glut of poor college students. A greater percentage of high school graduates are attending college. If you believe that native ability is probably the same today as it was forty years ago, then it stands to reason that more mediocre students are now in college. ACT scores are still not back to the levels of 1970. Low graduation rates attest to the possibility that many students are squandering lots of resources and getting into a lot of debt. About one in two entering freshmen leave their four-year college without a degree. The average graduate has $25,000 in student loan debt. Wouldn't a fair number of these students be better off with a two-year degree and a lot less debt?
I was lucky to have the opportunity to back up my four years of liberal arts with some real world training in skills-based master's degree programs. I'm not sure how well things turned out for our group. Most of my liberal arts friends spent a number of years pursuing low-paying, high passion jobs. I worked in photography. I had peers with equally romantic paths: rock musician, rock musician, jazz bassist, filmmaker, chef, wood worker, and poet. Today, the bassist works for a law firm, the filmmaker runs a restaurant, one of the rock musicians is a college professor, and I work for a non-profit. We all went back and earned master's degrees, or even a doctorates. The ones that had to stand on the merits of their college degree never found their footing. The poet, carpenter, and one of the rock musicians are not working at all. OK, that is not entirely true. The poet does run a few training workshops in zen. It might be a coincidence, but none of the non-workers added another degree to their bachelor's.
The colleges aren't going to reform on their own. My liberal arts professors went on and on about the value of our humanities classes. I was told that business leaders would crave workers with knowledge of Reformation history. Any manager would want to have access to my talents in literary criticism. Yes, I could be sure that my appreciation of the arts would all be valued in corporate America.
Well, they had it wrong. I did not meet many supervisors that wanted to hear my thoughts on Kant. They wanted skills.
I see a few conclusions from our experiences. First, that expensive education didn't translate into better earnings. We all needed something else to get us to the next level. It makes me wonder if the two-year trainings that we got as master's students could have have replicated through some other educational path. Last, it shows how hard it is to rely on numbers that compare wages by education level. Few people opt for a job whose only attribute is its high pay package.
There is data out there that students with a two-year degree achieve better career prospects than students that attend four year colleges but fail to graduate. A two-year degree still has a lot of value: The College Board notes that unemployment was 2.5 times greater for high school grads compared to people with associate's degrees. Three-year colleges have some merit, too. Perhaps that would be the ideal path for a student that expected to pursue a master's degree after graduation.