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Fabricating Victims: The Student Debt Crisis

May 15, 2016.


Replenishing the Base with Bogus Victims


The Democratic Party is at its progressive best when it is fighting for the genuine victims of injustice and economic inequality - the struggle for collective bargaining and civil rights for example.


But is it progressive if the Party stage-manages victimhood to shore up its political power? In other words, what happens when the Party runs out of genuine victims to fight for?


In a perverse way, victimization is the lifeblood of the Democratic Party. To prosper over the long run it needs to replenish it electoral base with new victims, especially when old allegiances crumble. The obvious example is the defection of the white working class to the Republicans, first as "Reagan Democrats" and now as "Trump Democrats," or, in Hillary's words "deplorables." The economic status of white men without a college degree has been severely eroded by technological change and globalization, both of which prospered during Clinton's tenure. Yet the Party did woefully little to compensate those victims.


So instead of striving to win back those genuine victims, the Party is fabricating replacement victims from the ranks of the relatively privileged. It is bestowing victimhood on groups that populate the upper half of the income distribution.


College Students as Victims


An excellent example is the Democratic crusade to rescue college students from the so-called "debt crisis." Casting students as helpless victims of crushing debt actually disguises the real problem, which is Higher Education's penchant for raising tuition during a period of declining household income.


Progressives' advocacy for the wholesale cancellation of student debt is merely political pandering. Contrary to the Democrats' narrative, the vast majority of student borrowers are privileged, and it's not just because they tend to come from more affluent families. It's because the payoff from investing in a degree is enormous. Today's average rate of return on the money spent acquiring a bachelor's degree rivals that of Warren Buffet, about 13%. The fact that some of the investment is financed with borrowed money does not diminish that impressive number.


Consider the statistical profile of the median borrower who graduated in 2012: Regardless of credit history, she easily qualified for low-interest, unsecured loans that totaled $25,000 by graduation day. The payoff from her bachelor's degree is a huge "college premium:" she stands to earn almost $1,000,000 more than a high school graduate over a lifetime. So after repaying $25,000 with interest over ten years, our median borrower is left with at least $960,000 in extra earnings. Similar good fortune applies to the vast majority of 2012 graduates: 70% of them accumulated less than $30,000 of debt; and 70% graduated in fields whose college premiums range from $800,000 to $1,250,000. This is not the profile of people victimized by unaffordable debt.


But wait! Those numbers actually understate the payoff from a college degree. That's because the estimated premium of $1,000,000 refers only to workers who are fully employed year-round, a privilege less common among high school graduates. The latter are roughly twice as likely to be unemployed or underemployed. Furthermore, that $1,000,000 does not include the greater value of health care and pension benefits that come with college level jobs. And let's not forget the monetary value of safer and more pleasant working conditions: the risk of physical injury is 400% greater for a machinist than a bond broker.


Return on Investment (ROI) depends on Major Field and College Costs


Unfortunately, a minority of students end up saddled with debt they cannot afford to repay. The worst culprits in this regard are for-profit colleges. They charge 57% more than public colleges for programs with poor success rates, and sweet-talk students into debt with exaggerated claims. However, even at non-profit institutions the ability to repay is ignored when it comes to dishing out student loans. This is indicated by the fact that students in major fields with poor earning prospects are afforded the same level of debt as those in potentially lucrative majors.


But debt is not the problem. Borrowing is simply one way to pay for the cost of attending college; it's a way to finance an investment. So, the term "unaffordable debt" is just another way of saying that a college degree doesn't pay enough to cover the cost of attendance, in which case the investment in college has a negative rate of return.


So, how do a minority of college graduates end up with a negative return? They either attend over-priced colleges or graduate in fields with puny college premiums, but usually both. A student that graduates from expensive Sarah Lawrence with a degree in Creative Arts is probably destined for a huge negative return on investment even if she doesn't borrow a dime. Even at subsidized public colleges, graduates' expected ROI has been negatively effected by the 100% rise in net tuition since 2000.


Indeed, students are taking on more debt precisely because "net tuition" (the price they actually pay) has increased faster than the median family's ability to pay (see chart). Today it takes 14% of median household income to cover net tuition, compared to only 9% in 1998.


net tuition 4-yr colleges and family income

The fact that net tuition has been increasing faster than general inflation since 1975 suggests that higher education is addicted to budget-bloat, a sure recipe for eroding a college degree's ROI. However, demographic trends portend a decade or more of declining college enrollment, which may make it harder for colleges to feed their addiction. We will see.

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