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Debt-Free: An Unrealistic Expectation

posted by Elizabeth Warren

A Vice-President at Dickinson College complained about the move by wealthier schools to eliminate student loans as part of the aid package, arguing that such a move creates the "unrealistic expectation that students should graduate debt-free."  He points out that people borrow for cars and homes, and that education is just like any other big-ticket purchase.  In effect, rich people can buy it for cash and those with less money should finance it over time. 

If education is like a Hummer--cash or credit--then why stop with college?  Why not shut down the public schools K-12, and let those whose parents want them to learn to read and write pay cash or take on loans? (Maybe we're heading that way with failing schools in some cities.) 

n thWe support public schools with tax dollars because we believe we'll all be better off if more people learn to read and write--even for those of us who don't have children in the public schools. Why isn't the same true for college?   

The GI Bill helped 2.2 million returning soldiers become engineers, scientists, entrepreneurs, and business leaders, fueling the economy and raising the standard of living. It cost $7 billion (about $240 billion in today’s dollars), but for every dollar invested, nearly five dollars were returned over thirty-five years in higher productivity and tax revenues. We all benefit when a smart person gets a good education. 

Undergraduate borrowers leave school with an average of $20,000 in debt, and average graduate borrowers owe $45,000. Defaulted student loans now top five million.  Debt now affects career choices, purchasing decisions (can you afford health insurance, a car or a home?) and even the decision to marry.   

My coauthor Ganesh Sitaramen and I have worked on a proposal called Service Pays. We think the federal government should make money available to pay the equivalent of four years of college at a state school (money could be used at a state or private school).  For every year after graduation that a student spends in public service (military, Peace Corp, Teach for America, etc.), a year of debts would be erased.  Four years of service would pay off four years of college--a sort of reverse GI bill.

This isn't a gift--it's there only for those who want to work in public service.  But for anyone who wants to work, regardless of family income, the option to pay for college through service is available. 

But our proposal starts from the premise that education is not like a Hummer.  It presupposes that we're all better off if young people have access to education.  And it assumes that starting adult life deep in a hole of debt is not a good idea.  I realize those are pretty controversial ideas in some circles.

The colleges that are moving away from debt believe that those who need aid should get outright gifts, not big debt loads.  Of course, many of the schools moving in this direction have big endowments (Harvard, Yale, Princeton).  But some schools of more modest means have moved in this direction too (Swarthmore, Bowdoin, Colby). Other schools might like to make their aid packages debt-free, but they are simply too constrained financially. Ganesh and I want to develop a way for students to help pay for their educations without taking on debt. 

But the Dickinson VP advances a contrary thought:  It isn't right to make college available at lower or no cost to students with less money. Instead, they should expect to take on debt. For some, paying for an education is like buying a fancy car.


Your proposal to erase debt in exchange for service is a great idea, and I'm sure that some people would be happy to take the government up on the offer. I'm not a big fan of the idea that poor people have to risk their lives in Iraq to pay for college, while kids from rich families just have their parents pay... but when the options include things like Teach for America, which a lot of college students are eager to do anyway, it becomes a great opportunity.

I tend to believe that Ms. Warren is probably biased since she's employed by Harvard University and needs the public to associate degrees with wealth instead of buyer's remorse.

Thus, I believe that student debt is OK since it forces students to form opinions about the "bang for the buck" which they receive.

Most recently, for example, fewer folks are getting MBA's since they're learning that demonstrated professional growth is more important than another entanglement with academia on their resume.

I also think that students would love the opportunity to mix and match courses from universities based on cost, personal objectives and reputation. This vision, I'm guessing, would differ from Ms. Warren's since universities like captive audiences.

I say this because websites like MIT's OpenCourseware (ocw.mit.edu) will eventually become the cheaper, faster, better way to earn credits and enable universities to focus their resources on managing research opportunites.

Most importantly, I do believe in online education since I recently decided to learn piano and the online advice (free) has been consistently better than what I've learned from my piano teacher since the online community is-- due to the medium, more diverse!

Thus, government money for a better internet is probably better than money for selective schools which can only help out a handful of folks.

Its a great idea - particularly so if the social benefits of getting the public service done and cost of one year loans balance out. At this point US government, like average US citizen, cannot afford even a cent of additional expenses. And that might be the only hindrance. Its difficult to re-wire the culture - but then bankruptcies are more difficult. But its necessary.

But just a thought - free breeds excesses. So a student should ideally asked to pay a fee - per year and then reimbursed at the end of the program.

They are trying that out here in India for educating the girl child. They put in a certain deposit in the name off the girl in a bank - the girl is allowed to withdraw the amount once she graduates. Also village schools give uniforms and meals to under-privileged students to incentivise them to learn.

Don't colleges get our tax money anyway? Jr. Colleges get our tax dollars and our kids still have to pay, albeit at lower amounts than out of state kids. I see the problem if someone wants a degree in something like “acting”, but if they have to go into public service anyway to get rid of the debt-- then why not? That four years of public service may make the person think twice about they type of degree they want. The individual colleges my have to make concessions on the rate of their increase in tuition costs. Maybe like Medicare? They are so used to getting what they want. You know they will put up a big stink. I think it’s a great idea for fields like teaching, medical, counseling, etc... I see so many teachers and counselors with more that 20k in student loan debt. On top of that they have to go to continuing education, licensing fees, etc..
Don’t know how you can work it when it comes to fields like engineering and medical???

Elizabeth Warren use a reductio ad absurdem argument. It doesn't work, because it assumes a comparability that doesn't exist. Here is her argument:

"Why not shut down the public schools K-12, and let those whose parents want them to learn to read and write pay cash or take on loans?"

The argument works fine if post-12 education is exactly like K-12. It isn't. The major distinctions:

1. As a society, we believe that K-12 should be near-universal. This belief is not shared for post-12 education. If we make it free but not universal, we must explicitly ration on some basis other than ability to pay.

2. K-12 education is dominated by state schools. Post-12 education is dominated by private nonprofits and state schools that emulate nonprofits. Nonprofits such as universities and hospitals are run for the benefit of senior guild members, not for the benefit of students. Tuition is one of the few external controls. K-12 schools have many more external controls: the political process, union-management tensions, parents, objective test results, etc.

I don't necessarily disagree with Professor Warren's conclusion. I just don't find her argument compelling.

I had the privilege of taking classes from Prof. Warren before she went to Harvard (where I couldn't have afforded to go!). I often disagree with her on policy and politics, but I never would believe she reached a biased conclusion from her self-interest as Harvard professor. She's a straight thinker and a straight talker. She was one of the most effective teachers I ever had anywhere. I still vividly remember her lectures from 25 years ago.

I love seeing her thoughts for free here! I would give my right arm to hear her lectures first hand. But alas, I am too poor and have kids now. Now I have to work and not study but I have at my disposal all of the Cir. Judges Ops that I can learn from and the wonderful papers by Prof. Porter, Warren, Lawless etc.. that even the cir. court judges cite. I learn so much from her on how to back up political views with the top notch research and legal theory. Her political views on the poor and income are surprisingly right on coming from a professor who teaches where arguably very few students have those types of problems. Ya, we are scooting towards socialistic type ideals but it doesn’t mean they are wrong or any less viable. It’s like the more white or affluent you are the more repulsed by anything having to do with socialism. That is until you reach Social Security age.

The Teach for America Program already depresses salaries and limits availability of permanent regular employment in the communities in which it operates. Any expansion (which Professor Warren's proposal would certainly entail) would be at the expense not only of the American taxpayer but at the expense of people who already have teaching certificates, who would have to compete with this army of young temporary employees whose services to a school district are essentially free.

This is also a downside of the beloved college work-study program as well, as anyone in a clerical occupation in a university town can attest. In Eugene Oregon, where the state university is the largest employer, our accounting clerks and data processors have to compete with students who cost the University (and some other state agencies and nonprofits) about $2 an hour, with no benefits. These people are using student loans to pay the living costs their part-time wages don't begin to cover, driving up those costs for working people who must live on their incomes. Volunteers in Teach for America and other public service programs even now must incur debt or rely on family subsidies to make ends meet; that would only get worse if the programs expanded and the pressure to remain in them mounted because of the debt forgiveness issue

Dr. Warren,
I would like to respectfully disagree with the assumption that you are better of without student loan debt. If you plug in the numbers into any retirement calculator, (I used Fidelity.com) most of the growth of your retirement earnings takes place by compounding the gains on previous earnings. The earlier you start, the much better off you end up. With student loan interest rates at roughly 2%, (that's what my loan is locked at) any money you save at rates higher than 2% make you money. I put into the retirement calculator a 22-year-old making $30,000, saving $600 a month, and a 26-year-old making the same amount, saving $800 a month, the difference being the assumed loan payment over the whole working period. The 22-year-old was better off at the end. (not by a lot, but that's assuming a $200 loan payment for 40+ years, even my student loans are'nt that much. I'll be done by the time I'm 50. It also assumes that the 26-year-old puts what would have been the loan payment into savings.) I also think we should have a mandatory national service plan, where everyone, not just those that borrow money, should have to serve. It doesn't have to be the millitary, it could be urban redevelopment, natural disaster recovery, National Guard, Teach for America, Peace Corps, Habitat for Humanity, Americorps, or even religious missions. Starting young men and women of all income brackets off with public service experience can do nothing but help them appreciate what government can do, and should be doing, for it's citizens.

TEXAN99: "Her political views on the poor and income are surprisingly right on coming from a professor who teaches where arguably very few students have those types of problems."

If you read her thoughts, she has no problem with Harvard's endownment even though Harvard's investments pick pocket the poor and implicitly promote policies which limit the wealth and size of the middle class.

JOE S.: "I often disagree with her on policy and politics, but I never would believe she reached a biased conclusion from her self-interest as Harvard professor."

Her "self interest" is simply ensuring that pay, benefits and pensions-- in the education sector, remain robust by tugging at people's heart strings; moreover, because she's a lawyer, she's good at presenting a classic Hegelian dialectic which tries to solidify her economic standing.

For Warren's work to be noteable, I'd suggest that she push something similar to the "free software" movement which means that folks could actually earn a "respected degree" without being nickel and dimed to death.

Teaching unions, unfortunately, continue to attack home schooling-- and other economically efficient solutions, in order to protect union jobs but, thankfully-- at least in california, the courts haven't listened and let unbranded alternatives persist.

Most importantly, and according to "The National Assessment of Adult Literacy," universities are failing to do their jobs:

Not only does it find that the average literacy of college educated Americans declined significantly from 1992 to 2003, but it also reveals that just 25 percent of college graduates — and only 31 percent of those with at least some graduate studies — scored high enough on the tests to be deemed “proficient” from a literacy standpoint... [http://www.physicsforums.com/showthread.php?t=104506]

Thus, if I were a student, I'd be very upset that an educational experience not only failed to improve my intellect but it also required me to become a serf in order to pay off debt since I'd feel like a homeowner who owed more on their home than it was worth.

Thus, for Warren's proposal to have credibility, I think that she'd have to propose that debt would be forgiven when colleges prioritize cash flow over standards.

Moreover, by putting folks in menial jobs, she'd be robbing them of rich experiences and, because research shows that the brain loses placitity as it ages, she'd actually be making people dumber by removing them from intellectually stimulating jobs at a time when when their brains are still learning.

hey Patches:

I loved your points.

I really don't understand why others think that Warren is "helping the poor" when what you discuss is true. Moreover, when I was at the University of Arizona, a student newspaper piece noted that "college costs went up simply because colleges equated 'loan availability' to 'ability to pay more.'"

Thus, the "affordability issue" was probably created by our universities.

Ultimately, the system will implode since-- like the housing crash, college costs will have to come down, or stagnate, as taxpayers and our children think twice about the value proposition.

Part of this will come about as other countries like China and India start competing with American universities since this competition will make our universities look weak and our professors will have to stop burning the midnight oil on their lucrative side businesses and start worrying about passing on knowledge to the next generation.

The federal government has no business in education. Read the constitution. Let state and local governments provide programs like this if you want, but leave the federal government out of it.

Patches: "The federal government has no business in education."

They'll always be there since the US government funds a lot of military research in US universities and runs military recruitment in k/12. so, your wish-- my wish, would be a difficult achievement.

Patches: "The federal government has no business in education."

ummm, they also recruit CIA and FBI agents in universities as well.

uhhhh.... "No child left behind" ????? Is that not a Bush thing? (I may be wrong) The fed giveth and the fed can taketh away. So if the states do something the fed does not like, say.. like give money to "Christian" schools via “vouchers” , they take funding away. The fed can hinder the individual states from taking on programs like the one kicked around here. The fed can be part of the problem or part of the solution. Either way there will have to be some interplay.

Patches: "The federal government has no business in education."

Why? Because the cost of education is outside of commerce?

The two interplay in my op PSP. That’s like saying "The federal government has no business in providing medical assistance, Social Security, Regulating the Drinking age, or guaranteeing Student loans" It's outside of commerce. It seems like since the "New Deal" the government figured out that what it does directly effects commerce, be it putting people to work in the federal parks system to the deregulating the mortgage industry. It all has some effect on our individual pocket books in one form or the other. To me education plays bigger in the "commerce" area than anything else. We are not really producing much in this country any more. Whether it should be like that or not I think is a question that will always be asked. They are there now whether we like it or not. Why not tweak it a bit more?

It seems that the Dickinson VP is lamenting the start of price competition in universities.

Universities have become quite inefficient producers of undergraduate education. As an avid reader of this blog and of Mrs. Warren's work, I believe that the world would be worse off if it were to ask her to teach more than a few hours per week. In fact, it is her prolific writing and extensive research that make her classes as valuable, and as expensive, as they are. Unfortunately, Mrs. Warren is the exception in American undergraduate education. Very little of the research conducted by university professors increases the value of the classes they teach. In fact, in many (most?) departments, research efforts are of primary importance in hiring decisions. A sensible, but time constrained young professor approaching a tenure decision will minimize his or her teaching efforts. In this sense, the research efforts reduce the value of classes.

If the market for undergraduate education becomes competitive, survival will depend on a university's ability to reduce tuition and increase the quality of education. It is seemingly inevitable that teaching positions will be eliminated, teaching quality will be more closely monitored and teaching hours will be increased.

Difficult decisions await this Dickinson VP.

The Federal government already does have a program like that, albeit slightly less generous than Prof. Warren would like.

The College Cost Reduction and Access Act of 2007 already did establish a new public service loan forgiveness program.

It forgives - possibly with tax consequences (the IRS hasn't ruled on this yet) - any remaining student debt after 10 years of full-time employment in public service.

The borrower must have made 120 payments as part of the Federal Direct Student Loan program in order to obtain this benefit.

If the borrower selects the (new, forthcoming) Income Based Repayment option (available July 1, 2009), the maximum student loan payment for those 10 years will 15% of the borrower's monthly DISCRETIONARY income, where discretionary income is defined as the difference between the borrower's adjusted gross income (AGI) and 150% of the federal poverty line, taking into account the borrower's family size and the state in which the borrower resides.

There will be no minimum monthly payment in this program. So if public service jobs continue to pay poorly and the cost of college continues to rise, conceivably borrowers could repay as little as $1/month (or less?) while performing 10 years of public service and then have the remainder of their student loans forgiven.

This program was the brainchild of Sen. Edward Kennedy, and was designed to allow young people to enter public service after graduation without worrying that they would have to forgo public service in favor of higher paying corporate jobs in order to earn enough money to repay their student loans.

It is not the 4 years that Prof. Warren envisions, but it is definitely a major step in that direction.

Patches: "In fact, it is her prolific writing and extensive research that make her classes as valuable, and as expensive, as they are."

I'd say it's the fact that universities can extort as much money as they want from their students since universities are the gateway to future jobs.

in general, every professor has their fans but based on the research that I've posted links to above, universities, while becoming more and more expensive, have been measurable doing a worse and worse job.

Personally, I feel that Ms. Warren can do as much research as she wants about poverty and laws but, ultimately, her thirst for a pension and good pay is a reason why others are stepped on so she's talking and thinking in platitudes.

I agree with you on policy, just not on the assumption about Prof. Warren's bias. She can be wrong without being corrupt.

I meant to direct that comment to "Smitty."

Well, this one certainly fired up everyone. I'm late to the party. The comment that caught my eye was the one about the Dickinson VP concerned about price competition. It reminded me that private institutions could not survive if their only constituency were the wealthy. There just aren't enough of them. So they need that student loan machine to gin up the income for the schools. And they favor that over any government program because the latter would start insisting on bang for the buck, and cost-effectiveness. Student lenders, by contrast, care nothing about the quality of the product their money pays for. They care only about the cash flow prospects of the borrower (and government guarantees, of course). Oh, and speaking of government intervention, there is that bit about government loan guarantees, isn't there?

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