”Too Big to Fail” Goes to College

Federal subsidies long ago achieved the goal of making higher education more attainable for students from middle- and lower-income families. Yet such programs cloud the fact that good politics often tend to represent bad economics. In this case, government efforts have reflexively ushered a generation of students down a one-size-fits-all conveyor belt that has too often left the federal government as little more than the underwriter of disappointment. Much as it propelled the housing boom, government policy aimed at “access” has fueled a dramatic increase in the cost of education. And, schools have been more than willing to turn abundantly available dollars into lighter teaching loads for professors, luxury dorms for students and state-of-the-art sports arenas, with little regard for whether these improvements are really worth it to student-customers. Ultimately, however, students foot the bill for these flights of fancy: they are required to repay their loans. And, their ability to do so depends, in large measure, on the quality of the education that they received from their chosen school. The fact that so many student borrowers are in distress today only serves to indict the value proposition that the education industrial complex continues to advance.
Aided by the government-encouraged extension of credit, education costs have skyrocketed. In fact, it is fair to describe today’s higher education price tag as having been reduced to a formula – where tuition seems to equal all the money a student can pay plus all the money a student can conceivably borrow. And, this same access-for-all government policy has made loan-eligible middle- and lower-income students easy prey for aggressive higher education and student-loan marketing. The end result has been an unprecedented, debt-fueled wealth transfer from students of modest means to the increasingly affluent higher education industry and its student-loan lenders. Unfortunately, as this damage continues to reveal its depth, its consequences are likely to become more evident by the day.
A generation of students has been reduced to the equivalent of the underwater homeowner: resigned to a fate where the amount owed to finance their schooling might be greater than the value of the education they received (and, therefore, beyond their capacity to repay it). All is not lost, however, as there are already machinations within the world of education suggesting that students, governments and institutions are, at long last, awakening to assign considerations of value to a world that for too long has seemed immune to such assessments.


Even the federal government has recently signaled that it is not entirely beyond insisting on minimal standards of value in the provision of education. Although representing little more than an effort at low-hanging fruit, the Department of Education is poised to propose new “gainful employment” rules designed to cut off federal aid to for-profit colleges whose graduates prove unable to earn enough to repay their student loans. In its most recent incarnation, the proposed regulations disqualify a for-profit college from receiving federal student aid if the debt load of its graduates proves too high to be repaid over a certain period of time with a certain percentage of the average student’s starting salary. In a sign of just how resistant many in the education industry are to value judgments, the Department of Education recently announced that it has yet to reach a final decision on the specific debt-to-income ratio that would trigger a school’s ineligibilty.
There is evidence that America’s students too are becoming more discerning consumers, asking tougher, value-driven questions about the education that they are buying and, at the same time, becoming more adaptive in achieving their educational bona fides. By openly discussing alternatives to college, for example, a more discriminating system might capably avoid a lifetime of stifling debt payments for innocent individuals otherwise susceptible to the one-size-fits-all school of thought. And, there is anecdotal evidence that thoughtful Americans are shedding their reflexive college-for-all mentality. Such a change is welcome, as, for example, among the Bureau of Labor Statistics’ top 10 growing job categories in America, only two require college degrees.
A recent report in the Washington Post noted that student loan demand is starting to wane, with students examining cheaper alternatives before embracing the college degree in the four-year, heavily financed mold. Part-time student rolls are soaring, as more students forego the traditional “college experience” for a more rational economic model of higher education. Community college attendance is swelling as well, a clear sign that the student consumer is more calculating and is increasingly embracing the option that comes with the cheaper two-year degree. Students are increasingly working part-time to limit their debt burden. In turn, they are extending their time in college, with the four-year degree less and less the norm. Other non-traditional mechanisms are being embraced to lower the overall cost of college or graduate school. These include the accumulation of college credits prior to matriculation, via the AP exam, and opportunities for online or overseas learning. Schools, for the most part, have had little choice but to embrace these changes, as they have come to realize that they are in competition to attract students and the model does not work absent a revenue source.
The increasing cost and changing landscape of higher education is also having other effects that social scientists are just now beginning to observe and understand. With the languishing job prospects of recent college graduates, for example, more and more students seem to be taking the rational economic step of favoring the vocation-oriented majors. While commentators like David Brooks decry the death of the classical education and its attendant societal cost, there is no denying that the recent popularity of accounting is more a bow to job prospects than a national fascination with the inner workings of the Financial Accounting Standards Board.
The dismal job market has also increased the demand for the relative comfort behind the ivy walls of the campus. Many students pursue advanced degrees in an effort to outlast the downturn. While this strategy has worked in the past, students in this category are generally doubling down on their debt burden. In a recent New York Times column, for example, Patricia Cohen rued a “stretched-out walk to independence” with 20- to 34-year-olds taking longer to finish their educations, establish careers, marry, have children and become financially independent. Keeping students in school longer aids a government fixated on the reported unemployment number, yet adds little to a nation’s gross domestic output or its tax coffers.
Of course, the federal government does not easily cede its turf. And so, Big Brother has embarked on a strategy to make things right by the nation’s students. Not surprisingly, the government’s most recent efforts only exacerbate and perpetuate already distorted and dysfunctional markets and, in the process, further endanger our nation’s fiscal soundness (if any). Much has been made of the response of the executive and legislative branches to the crisis that engulfed our nation’s banks and financial institutions in our recent past. Many have bemoaned the “moral hazard” that results from policies that bail out institutions following bad decisions and poor risk management. Unless these firms are made to take their medicine, we are told, they will only ramp up speculation in the face of a government contrivance that privatizes profit and socializes loss. When disappointment is met with government sustenance, why not shoot for the moon?
Under the Obama Administration’s most recent proposals, additional assistance is offered to student-borrowers, in the form of increased federal subsidy and loan forgiveness. Privatized gains and socialized losses once again reign supreme. In fact, every single dollar of loan forgiveness will come straight from the pockets of taxpayers and should be added to the already obnoxiously large amount of money that our nation spends, directly and indirectly, on education. Moreover, a program that continues to underwrite the unsatisfactory results of a student will only draw more students into the academy. While that sounds benevolent in theory, without a measure of cost or an understanding of value, non-economic outcomes will abound; and the student loan bailout will represent little more than “too big to fail goes to college.”
In the end, all of the government’s efforts to retain its central position of command and control within our nation’s complex of higher education seem doomed. It does not take an economist on par with Hayek to realize that the government’s principal flaw lies in its attempt to consolidate and assert its knowledge, authority, and decision-making power. Such a regime cannot survive the alternative that pushes the freedom and power to act out to the individual consumer who possesses the local knowledge and the incentive to act wisely and effectively.
As a nation, we simply cannot afford to allow non-economic policies to continue. Our citizens are getting used to the idea that if a trend is not sustainable, it will end. In the world of education, the only question that remains is whether our government will get the message and allow for the ending to be orderly.

Michael C. Macchiarola

Michael C. Macchiarola is a Distinguished Lecturer at City University of New York and the co-author of a forthcoming article in the Cornell Journal of Law and Publc Policy: "Options for Student Borrowers: A Derivatives-Based Proposal to Protect Students and Control Debt-Fueled Inflation in the Higher Education Market."

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