Student Loan Default Rates: Not an Easy Fix

The health care bill included some student loan fixes that attempt to address the high rate of defaults. I understand the imperatives for what they are doing. Defaults raise concern about fiscal cost-efficiency for the federal loan program (s), and they also point to ongoing weakness in employment and income security. I don’t think that these “fixes” are going to be enough, though, and they might only be a band-aid that fails to solve the underlying problems with how we prepare our students to be workers.

Consider three separate but interlocking items that we’ve seen in the news lately:

• The Bureau of Labor Statistics reported that unemployment stood at 9.7 percent in February. Civil labor force participation is only 64.8 percent.
• reading scores are flat.  Student proficiency is higher than it was in 1970 for younger students, but it has not improved at all among 17-year olds. Only 32 percent of students are proficient at reading in the 8th grade.
• Four years later, more of our students enter college than they ever have before.

The stated goal of our new student loan policy is to lower default rates. This is a very good idea. Unfortunately, until the economy improves it will be hard to get much traction on repayment rates. Until students come out of school with better skills, fewer will have the tools they need to graduate from college.

Inflation-adjusted earnings, 2000 to 2009, by level of educational attainment. Source - Bureau of Labor Statistics.

This combination spells trouble. More students are going to leave school before they graduate, and they will be chasing fewer jobs when they arrive on the labor market.  One odd outcome of this recession is that our work force is actually getting older: fewer older workers are leaving jobs and fewer young people are entering the workforce as soon as they have in the past.

This chart should get the point across that we haven’t had much wage growth in the United States in the last decade.  That is in spite of the fact that for much of the decade, the economy was fueled by an explosive housing sector.

This was also a time when the cost of attending college soared.  North Carolina is lucky to have a generous tuition policy. We are the exception. Even state universities are raising their tuition rates. The decision made this year in the University of California system was merely a sparking point for a larger anxiety among students and their parents about paying for college.

To change default rates, students need to borrow a lot less than they do now and they need to find jobs that pay more. The latest changes will raise Pell Grants (although not as much as had been hoped for), but performance needs to improve more. This is increasingly a global economy. Ultimately, wage growth (or the lack of it) reflects how well our workforce can attract investment relative to other nations.

The gainful employment rule, where for-profit and vocational schools are evaluated on a metric that is sensitive to the earnings of graduates, is just the kind of thinking that makes sense to me. It adds accountability to a system that is largely indifferent to students after graduation.