The Perverse Incentives of Student Debt

Student debt in the United States is now around $1 Trillion. This debt is inextinguishable, which means that banks and policy makers have insisted that young people be more responsible for their bad financial decisions than adults or corporations, both of which can, of course, free themselves from un-payable debts through bankruptcy. Not so for students whose massive indebtedness is creating a lost generation of young people whose lives are stifled by unwise decisions made before they were allowed to buy a beer.

A new study by the Pew Research Center shows that educational debt burden is crushing America’s young.  Here is a chart from Pew.

Walter Russell Mead glosses the Pew report in this way:

The [Pew] study reports that one in five American households is now saddled with student debt, 15 percent more than in 2007. And the amount of debt households are carrying has also grown: the average debt burden is now more than $26,000.

Worst of all, the debt burden is heaviest for those who can least afford to carry it:

[W]hether computed as a share of household income or assets, the relative burden of student loan debt is greatest for households in the bottom fifth of the income spectrum, even though members of such households are less likely than those in other groups to attend college in the first place.

The idea of sending our poorest members to college is born of a noble impulse. And many of these young people are indeed given full scholarships to elite colleges. But it is one thing to pay for the brightest and most industrious of our young people to go to college. It is something else entirely to tell others, those who did not earn a scholarship of some sort, that it makes sense for them to borrow tens if not hundreds of thousands of dollars to get a diploma from a third or fourth tier school, or even a for-profit college. There is a perversity in this system that saddles young people with possibility-denying debt.

-RB