Student debt is a helpful lens for dissecting the ongoing presidential election.
• Hillary Clinton presents student debt as a financial problem, with a set of pragmatic fixes like different interest rates.
• Bernie Sanders presents student debt as a moral problem, which he will solve, like Robin Hood, by taking money from the rich (“Wall Street”) and give it to the deserving poor (“students").
• Donald Trump sees student debt as a political issue to which he offers his universal non-solution, “I’m clever: trust me and don’t ask questions!”
None of the three presidential candidates is telling the electorate what they need to hear: student debt is not only a financial, moral and political problem—it’s also a major macroeconomic problem that is crushing the entrepreneurship that America needs for its prosperity and failing to provide the education system we need for the future.
As I pointed out in my article on May 27, American entrepreneurship has been declining for decades. A prime suspect is the burden of student debt on the segment of the population that can least afford it. The current $1.2 trillion in outstanding student debt translates into a total lifetime wealth loss of $4 trillion for indebted households, at a time when good jobs are increasingly hard to find. Solving this massive economic and social problem depends on nothing less than rethinking the very purpose of a country and its government in the 21st century
The problem of limited jobs for graduates is poignantly depicted on the current cover of The New Yorker magazine, in which students from a graduation ceremony in lavish surroundings for the “Class of 2016” walk by a yard worker, who is wearing a T-shirt labeled “Class of 2015.” Today’s it’s not unusual for tenured professors to be still paying off their student loans.
The Growth Of Student Debt
This was not the way things used to be. A quarter century ago, most students didn’t have to borrow money to graduate from college, and those who did typically took out less than $10,000 in loans. By 2016, over 70% of the graduating class of 2016 took on an average of about $37,000 in student loans to finance their degree. The total sum of student loan debt for the Class of 2016 comes out to around $60 billion—12 times the amount that graduating classes that the early ’90s held.
The increasing student debt is caused by two factors: the meteoric rise in the cost of college in the U.S., and the fact that state governments drastically reduced funding higher education. The increasing cost of college had less to do with improved education and more to do with higher administrative costs and services, including more lavish facilities and sports. With less public investment from state governments, less-well-off students had to pay a larger share—or miss out on a college education.
The Government As Robin Hood
Understanding what’s gone wrong with student debt can benefit from recalling the myth of Robin Hood and his Merrie Men, who lurked in Sherwood Forest, and stole from the rich and the government—in the form of the wicked Sheriff of Nottingham—in order to give to the poor.
The U.S. welfare state was built on an analogous grand narrative: it existed to take money from the better-off in order to fund public projects. In President Franklin Roosevelt’s New Deal, government was presented as a kind of modern Robin Hood, which took from the rich and gave to those in genuine need to create an equal and prosperous economy. This worked fairly well for half a century.
Reagan’s Reverse-Robin-Hood World
In 1981, as the economy sputtered, President Ronald Reagan proposed reversing this myth and declared in his inaugural address that “government is the problem,” and in effect, taxation is theft. Reversing several generations of thinking in which government funding had successfully provided the basis for an equitable and prosperous economy, government was now presented as the enemy of the people, an evil to be demonized and cut back at every opportunity.
Reagan gave birth to a reverse-Robin-Hood world, in which government should take from the wasteful poor and hand back to the rich what they had justly earned. The rich were the virtuous “makers” of the economy, who had a moral right to be wealthy. Their very wealth demonstrated that they were worthwhile citizens. In this perspective, going forward, prosperity would be further enhanced if the rich were relieved of the crushing burden of unjust taxation.
In this world, the less-well-off were now seen as moochers and “welfare queens,” often portrayed as black and swathed in furs, who drove their Cadillacs to the welfare office to pick up a dole from the government that amounted to massive tax-free incomes.
In Reagan’s reverse-Robin-Hood world, corporations were presented as virtuous citizens. Their very purpose was to grow and make money for themselves, their shareholders, and their executives. If they did this, it was suggested, everyone would be better off, with the help of Adam Smith’s "invisible hand."
In this new world, Peter Drucker’s 1954 insight that the only valid purpose of a corporation is create value for customers got lost in a frenzy of institutionalized selfishness. Never mind that maximizing shareholder value turned out to be, as even Jack Welch has pointed out, “the dumbest idea in the world.” The corporate-welfare state was born and celebrated as “morning in America,” as the country set off on its decades-long path towards value extraction, financial engineering, Potemkin prosperity and secular economic decline.
When colleges decided to join the party and make money by filling seats and providing more services and sports, the cost of tuition steadily rose. State governments, which had bought into Reagan’s “government-is-the-problem” philosophy, were busily cutting back and they declined to foot the bill. The availability of easy credit to students created a loophole for state governments to abdicate their funding responsibility without causing a public outcry.
So the escalating cost of college was passed on to students and financed by loans. The loans were generous in the sense of being easy to obtain, but onerous in the sense that interest rates were high and the burden eternal—no bankruptcy was possible. Society thus presented less-well-off students with a terrible choice: take on these onerous loans or opt not to get an education. Many students were not in a position to evaluate whether the courses they were taking would lead to employability.
The availability of easy credit for a college education also encouraged an under-emphasis on vocational training, which is a big part of the European approach to generous tertiary education. In Europe, tertiary education is sometimes a universal right but there are often also strong encouragements to channel many students into vocational training.
Problems In The Quality Of Education
The college education being funded by this massive student debt in the U.S. was not always high quality or good for the economy. Tertiary education has been slow to innovate and has not yet to come to terms with 21st century shifts in technology and the economy. Colleges have been hesitant to exploit the possibilities of distance learning through MOOCs or to adjust their curricula for an economy driven by innovation. There are too many colleges charging high fees for courses of dubious worth.
Trump University, for instance, has been cited as an example of high-cost low-value courses being provided by private colleges. Trump University was started in 2004 to offer courses in entrepreneurship under the Trump brand and ownership.
Two class action lawsuits are now being litigated in San Diego accusing Trump University of using deceptive practices as it brought in millions of dollars from customers who were told they would learn Trump’s techniques to become successful in the world of real estate.
In addition, in 2013, New York Attorney General Eric Schneiderman filed a $40 million lawsuit alleging that Trump had defrauded more than 5,000 individuals through Trump University, which was never licensed as an educational institution. Trump and his attorneys have vigorously denied the fraud claims.
A Vicious Cycle
The U.S. thus slid into a vicious cycle. Colleges expanded services and administration while costs soared. State governments cut their budgets in line with the Reaganesque rhetoric. Less-well-off students had little choice but to take on onerous debt.
At first, the arrangements looked like a solution. State budgets were reduced. Students got their education, or at least those who graduated got a diploma. College education could be presented as dream that was open to everyone. Financiers made money from the loans with little risk. Colleges made money by filling seats and charging tuition dollars, regardless whether what they taught would ever lead to employment.
But now that the student debt has reached $1.2 trillion, with an implied lifetime income loss of $4 trillion, with severe delinquencies around 17%, with job prospects uncertain and with large scale student rallies led by presidential candidate Bernie Sanders, the whole edifice of student debt looks in peril.
What are the presidential candidates proposing to do about it?
Trump’s Non-Plan
Given the problems and the ongoing lawsuits against the failed Trump University, it is hardly surprising that Trump has said very little about the issue of college tuition or its funding.
At a campaign rally in January 2016, he expressed concern about college tuition costs and the swift growth of student loan debt in the United States but he offered no specifics on what he would do about it. “It's one of the biggest questions I've had from young people,” he said, and stumbled through an answer that criticized the federal government's meddling in higher education and then promised to create more jobs. "I often tell my supporters I'll be the greatest jobs president that God ever created," he said, albeit without explaining how.
The Sanders Plan
Sanders says the current system is morally wrong. His call for free higher education has been a key to his surging popular support and his massive rallies of younger voters. His plan would require public colleges and universities to meet the financial need of the lowest-income students. Under this plan, low-income students would use state, federal and institutional aid to cover tuition, living and other expenses. He also proposes an increase in federal aid programs, calling to "more than triple the federal work-study program to build valuable career experience that will help them after they graduate. He suggests paying for all of this with a new tax on “Wall Street” that could generate some $300 billion over ten years. The cost of his program has been estimated at some $700 billion over a decade.
Sanders views student debt as a moral problem: everyone should have a right to free tertiary education. His plan would continue and expand the existing flawed education system. It would also provide financial support to those who don’t need it. The program would involve a massive expansion of entitlements, with uncertain prospects of securing funding.
The Clinton Plan
Clinton has a financial plan to make college affordable and debt less painful for everyone, called the New College Compact. It has three elements. First, in-state public university and community colleges would be completely free. Students who qualify for Pell Grants will be able to use them for living expenses. There would be special help for black colleges and for students who are also parents. Second, the plan would refinance existing debt at lower rates. Third, the plan would crack down on predatory schools, lenders, and bill collectors. Those who defraud students, overcharge veterans, or mislead borrowers, would be held to account.
The cost? Some $350 billion over 10 years. It’s a workmanlike plan to deal with the financial issues, but it is unclear how it would deal with profound political and quality issues in the US tertiary education system.
Is Government The Problem?
Merely putting together a public financing plan for the existing system won’t win broad acceptance unless the political philosophy that underlies the current arrangements shifts.
Student debt isn’t just a jobs problem, or a moral problem or even a financial problem. It’s a massive economic and social problem. One root cause resides in the Reaganesque ideology that "government is the problem", that taxation is inherently evil, that organizations exist to make money for themselves, and that shifting financial burdens to individuals will lead to widespread economic growth and shared prosperity for all.
So long as these views still a widely accepted as the way to run the economy, it is hard to imagine acceptance of massively expanded public funding of the existing system of tertiary education. Nor would that necessarily be a good thing, since the current system does not meet our current needs and not everyone is suited to a college education.
Similarly, so long as the purpose of an organization, including colleges, is seen as making money for itself, its shareholders and executives, it will be hard to rein in colleges and get them to refocus their efforts on providing real educational value to their students.
Rethinking Both Government And Education
Ultimately political leaders must help the country rethink the function of government and education, while emancipating us from the illusions of Reaganism.
"With a bit of money in the bank,” as James Meek has written in an interesting article in the London Review of Books, “a middle-class family might choose to send their child to private school, provided by the market; but that same family can’t choose to build and maintain a universal education network by itself, and the market won’t provide it. With money, you can choose to buy a car, and the market will provide it; but you can’t choose, all by yourself, to build and maintain a universal road network, and the market won’t provide it. To make and keep universal networks requires the authority of the state, an authority that has been absent; and it’s hard to see where that authority might come from if the people don’t find a way to assert their kingship."
In effect, government is neither "the problem" nor "the solution," but it has to be part of any realistic way of resolving these issues.
Resolving them entails a recognition that the education system we have now is ill-suited to the economic challenges we face, with the requirement of skilled talent generating continuous innovation.
We desperately need something different. The current tertiary education system is based on industrial era thinking, teaching people what is already known and testing them on what they can recall. There are standardized curricula, textbooks and tests, all designed to sort people into categories for employers. Things are moving too fast for certification bodies to keep up. One Gallup-Lumina study shows that only 11% of employers think graduating students have the skills that their businesses need.
Instead of a system based on industrial era thinking, education needs to be preparation for life-long learning, generating a capacity to ask the right questions instead of training students to recall the right answers.
So the issue is not so much "How do we finance the current flawed education system?" Our political leaders need to think bigger and consider: "How do we create and fund an education system that meets the real needs of the 21st century economy?" And: "How do we get from where we are now to where we need to be?"
And read also:
Why U.S. Entrepreneurship Is Dying
Can Higher Education Be Fixed?
What’s Wrong With Today’s Business Schools?
Why Aren’t Business Schools More Businesslike
Follow Steve Denning on Twitter @stevedenning.
