We know that college loan debt can be a ball and chain for the young people who graduate owing significant sums of money.
But college loan debt also has a harmful effect on the economy as a whole, according to a piece in today’s Wall Street Journal by Mitch Daniels, the former governor of Indiana and now the president of Purdue University.
The damaging results of college debt include forcing young people to delay buying houses and postpone marriage and starting families. A Pew and Rutgers study reported that around half graduates with college debt fear that they will default on other loans because of the education obligations. But these are personal costs. There is also a cost to society:
A variety of indicators suggest that the debt burden is weighing on the engine that has always characterized American economic leadership—and the factor that many have assumed will overcome many structural and self-imposed challenges: our propensity to innovate and to invent new vehicles of wealth creation.
For instance, the U.S., despite its proud protestations about how creative and risk-taking it is, has fallen in multiple world-wide measures of entrepreneurship. A drop in such activity by the young is playing a part. From 2010 to 2013, the Journal reported on Jan. 2, the percentage of younger people who reported owning a part of a new business dropped to 3.6% from 6.1%. Over the past 10 years, the percentage of businesses started by someone under 34 fell to 22.7% from 26.4%. Common sense says that the seven in 10 graduates who enter the working world owing money may be part of this shift.
New data strengthens this hypothesis. Working with the Gallup Research organization, Purdue scholars devised last year’s Gallup-Purdue Index, the largest survey ever of U.S. college graduates. Among its findings: 26% of those who left school debt-free have started at least one business. Among those with debt of $40,000 or more, only 16% had done so.
President Obama always proposes addressing the college loan problem by tinkering with interest rates and flirting with debt forgiveness. But why not go to the heart of the matter: the exorbitant tuition and associated costs of obtaining a college degree?
Daniels regards controlling the cost of college as a social and moral obligation. At Purdue, there is a tuition freeze that has brought costs of attending college for the last two years, an unprecedented in American education. Purdue has done this by restricting the cost of books and room and board. Daniels writes:
Aggressive counseling of students about the dangers of too much borrowing, and the alternatives available to them, has also helped, as total Purdue student borrowings have dropped by 18% since 2012. That represents some $40 million these superbly talented young engineers, computer scientists and other new workers will have to spend, or perhaps invest in their own dreams of enterprise. At Purdue, where we give students the ownership of any intellectual property they create, and support their attempts to give birth to new products and companies, a significant number of such dreams are likely to become real.
Today’s young Americans have a very legitimate beef with previous generations. A pathetically weak recovery has left millions of them unemployed, underemployed and with falling incomes, not the rising ones their predecessors could expect. And, never forget, they are already saddled with a lifetime per capita debt of some $700,000 (to date) to pay not for debts they incurred, but for those run up in entitlement programs such as Social Security, Social Security Disability and Medicare, explicitly designed to tax the young to subsidize their elders.
For future generations to enjoy the higher living standards America has always promised, nothing matters more than that the U.S. remains a land where miracles of innovation and entrepreneurship happen consistently. As a matter of generational fairness, and as an essential element of national economic success, the burden of high tuitions and student debt must be alleviated, and soon.
Instead of spreading the debt around or floating the prospect of debt forgiveness, some people like Daniels are looking for innovative ways to cut debt. Former Texas governor Rick Perry, who like Daniels knows that the tuition is the culprit, has urged educators to develop plans to get a degree for $10,000.
I also urge you to read AEI head Arthur Brooks' famous New York Times article headlined “My Valuable, Cheap College Degree.” Brooks' degree cost around $10,000. I’m not going to tell you his secret–you really need to read this article.
The takeaway from Daniels, Brooks, and Perry is that we really can solve the problem of college debt—if we are willing to go to the source of the problem, which is ever rising tuition.
This is a problem that is made worse when the federal government gets involved in providing funds because this encourages colleges that should be cutting back to go full speed ahead and raise tuition, knowing that Uncle Sam will be waiting to write big checks.