Student Loan Standoff: How The Free-Market Can Fix Our Broken Educational System

The following is the second article in a two-part series dealing with student loan debt, and how the application of free-market principles can ensure both the quality and integrity of the American post-secondary educational system.

A catastrophic financial crisis that involves student loan debt continues to loom on the horizon, yet hardly anyone seems to be taking notice. With skyrocketing tuition rates, a record number of borrowers accumulating greater amounts of debt, and an ominous increase in delinquency rates, should the issue persist without being acknowledged as a problem that could have dire consequences similar to the housing market collapse in 2008, history will indeed prove to repeat itself once more.

In last week’s article, both the rising costs of higher education and the number of those receiving financial aid were discussed at great length. Before offering solutions to the contemporary student debt predicament, it may be appropriate to underscore several other startling statistics that should bring the issue to the forefront:

• According to a report published by TransUnion in January 2013, more than half of all student loan accounts are now in a deferred status.
• Between 2007 and 2012, student loan balances increased by 75 percent.
• Over the same time period, federal loan balances rose by 97 percent, while private loan balances only saw a marginal increase of 4 percent.
• The delinquency rate for federal student loans as of 2012 stood at 12.31 percent.
• In March 2012, the Consumer Finance Protection Bureau reported that the total outstanding student debt had surpassed $1 trillion, $864 billion of which had been accrued by individuals who received financial aid from the federal government.
• The same report indicated that only 37 percent of student loan borrowers between 2004 and 2009 were able to make timely payments without postponement or becoming delinquent.

While the causal relationship between tuition rates, the number of borrowers, and student debt shows a cause for concern, when taking into account the statistics above and noting the grim job prospects for recent college graduates, 53 percent of which are either unemployed or underemployed, the inherent problems in higher education funding becomes more perceptible. Relaxed lending practices, low interest rates, and increased subsidies for higher education will not solve the inevitable student loan bubble. If anything, the perpetuation of modern lending practices and increased funding by the government to extend the possibility of post-secondary educational attainment to as many individuals as possible will only aggravate the situation.

Unfortunately, in the politically-correct climate of 21st-century American politics, the state seems more concerned with extending a doctrine of social fairness than ensuring the United States remains a global economic leader, able to foster a business-friendly environment that is characterized by competition and innovation. However, not all hope is lost for the vitality of our economic future, and education remains an integral element to such success. When free-market principles are applied to our educational system, colleges and universities in the United States will become more efficient and affordable, and as a result, a new wave of entrepreneurs and leaders will emerge, equipped with marketable degrees and capable of dealing with the most pertinent challenges of a diversified and global economy. But first, these principles must be injected into the system to produce the intended results.

Many may fault the government’s willingness to extend financial aid to almost anyone with the ambition to obtain a four-year degree, but the majority of prospective students themselves, being so enthralled by the prospect of graduating college, may not fully comprehend the potential perils associated with accumulating tens of thousands of dollars of student debt. For this reason, organizations such as the National Financial Educators Council believe the root of the problem lies within a lack of basic financial knowledge among today’s youth. As a solution, the group advocates a program that would require potential students under the age of 21 to complete financial education coursework prior to accepting federal financial aid money. The NFEC believes that by providing a basic level of financial comprehension, young adults would make more informed decisions before placing their signature on federal loan documents that result in an average debt above $23,000 for recipients of bachelor’s degrees. While the intention of such proposals by the NFEC may have a positive impact on the solvency of student debt, it fails to address the sense of entitlement many feel towards college education, and it therefore lacks any meaningful, long-term solutions provided by other initiatives that incorporate free-market components to substantively deal with the issue at hand.

Although lofty, idyllic promises of college education for those who wish to pursue a degree may be politically feasible for politicians emitting such assurances, these guarantees, often backed by the full faith and credit of the United States government, have hardly any basis in reality. With over one-third of college graduates working menial jobs that do not require a four-year degree, it is time society recognizes the veracity of free-market education, and the benefits such policies can have on the educational system. First and foremost, the government must acknowledge that by subsidizing higher education, they are creating a scenario where more individuals are accumulating debt while the cost of attending a post-secondary institution drastically increases. In doing so, the government can help reduce the number of under-qualified college students by tightening their lending practices. 40 percent of college students who borrow student loans fail to graduate within six years, yet receive more financial aid than the motivated students who may graduate in three or four years. As Dr. Richard Vedder, Distinguished Professor of Economics at Ohio University said in his column on a similar topic, “we reward mediocrity and punish excellence.”

In order to reward students based on academic merit, it is important to control the costs of tuition, while ensuring the value of a college degree. Free-market principles accomplish both objectives. Government subsidies in the educational system encourage individuals to obtain a degree, regardless of whether or not there is market demand for that particular field. As the unemployment rate continues to remain at inadequately consistent levels, particularly among recent college graduates, it is imperative that colleges and universities are able to teach and produce the job creators of tomorrow, rather than inundating our economy with an influx of unskilled labor unable to compete in the global marketplace. The basic function of economics is the allocation of scarce resources, and higher education should not be immune to such conditions. Drastically reducing, or even eliminating education subsidies would inevitably lower the cost of attending college, maintain the value of a college degree, and ensure that entrepreneurs and professionals receive quality training necessary for their future success. As a result, prospective students may be more inclined to seek a marketable degree with a realistic demand, rather than taking on debt for impractical purposes. Our economic vitality may depend on whether or not such policies are adopted in the immediate future to address the unsustainable flaws inherent in our current educational system.