Inequality: Why the Tuition Bubble and Student Debt Matter

 

While drawing this, I realized two things: (1) American Gothic is a beautiful painting, and (2) I'm going to look like the father when I'm old. Creepy.

Knut, “Is Lack of College Education the Cause of Income Inequality in America,” in First Tier Toilet!

Mish Shedlock, “How Student Debt Wrecks Marriages, Inhibits Family Formation, and Delays the Housing Recovery,” in Mish’s Global Economic Trend Analysis

–“Bubble in Law School Tuition and Lawyers?

Timothy Noah, “The United States of Inequality,” in Slate

Dianne Molvig, “After the JD: Careers Seven Years Out of Law School,” in Wisconsin Lawyer

Kelly Field, “Government Vastly Undercounts Defaults,” in The Chronicle of Higher Education

Alan Collinge, “The Argument,” in StudentLoanJustice.Org

[Recently, Knut questioned Fed Chairman Ben Bernanke’s claim that income inequality has grown because of education attainment differences: Better educated Americans are more likely to be employed.  I should say at the outset that I don’t have a high opinion of Ben Bernanke.  For someone who’s an expert on the Great Depression, he’s not much of a New Dealer.  However, thanks to him via Knut, I can serve you my opinion on student debt and income inequality—a ramble I meant to publish a few months ago but didn’t get the chance.]

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This was meant to be the Gini coefficient, if you didn't know.

I find discussions of income inequality fascinating.  I’ve always been a fan of the Gini coefficient, despite its myriad drawbacks.  For example, I think if NALP calculated one for lawyer starting salaries, the bimodality (and unemployment) would be more evident.  So, I enjoyed reading Timothy Noah’s investigation into the topic.  It occurred to me that when we calculate income we use after-tax income (I hope).  Beyond that, it’s up to the individuals to efficiently manage their expenses.

Student debt, because of the undue hardship exception in the bankruptcy code is unlike any other kind of expense.  It cannot be reduced, switched off, or exchanged on a secondary market (e.g. switching cell phone plans or moving from a house to an apartment).  It’s essentially a tax that isn’t considered a tax; it’s regressive, meaning it now afflicts younger people with lower incomes (and increasingly none at all), and it’s a deflationary force in a deflating economy.  As a result, any calculation of income distribution in the United States that excludes student debt will skew in favor of a more equal society than actually exists.  In other words, $850 billion of our inequality is off the books.

To make things worse, student debt, especially for those who’ve completed graduate or professional degrees, is rocketing over the inflation rate.  What are the consequences?  Enter Mish Shedlock:

[T]his is a serious macro issue. Housing typically leads the economy out of recession. If couples put off marriage, or never get engaged in the first place, that obviously hinders family formation.

In turn, that hinders the demand for houses and related goods and services, not to mention the goods and services required to have kids.

Moreover, student debt contributes to the problem of unloading a massive inventory of homes and a massive shadow inventory of homes on top of that. Many students are so deep in debt and without a job that not only have they delayed marriage, they have moved back home and are not even renting apartments.

Banks sitting on foreclosures thinking that a housing recovery is around the corner, have another thing coming. These structural problems, including boomers headed into retirement wanting to downsize their homes (with no one to sell to), puts additional pressure on home prices.

Answer: prolonged stagnation until the political will to restructure or bail out debtors emerges.  Once that happens, though, higher education as we know it, and certainly legal education, will collapse, causing yet more unemployment and contraction.  This time it’ll be among faculty, administrators, and staff.

It was with these issues on my mind that I read Dianne Molvig’s piece on the “After the JD” project (AJD).  Aside from the methodological question of what a study of year 2000 graduates in 2007 (AJD2) can actually tell us about the prospects of law students who paid 30-50% more in tuition and a bleaker job market, the study does tell us what these people thought of their debt.

At seven years out of law school, two-thirds of AJD2 respondents still carried education debt, with a median remaining debt of $50,000…“[W]hile the immediate decision of which job to take is not strongly influenced by debt, respondents nevertheless appear to feel the weight of their debt in a more global way.”… But [Gundersen Lutheran Health System in-house counsel Dave] Adams takes a philosophic view of the situation. “Each of our debts cost more than our house,” he says. “But it’s okay because I get to do the work I like doing, which is great. And they can’t repossess my brain.”

More recent graduates have little hope of paying off their debts within their career spans and they’d be better off if banks could repossess their degrees.  Unlike the AJD participants (hopefully they’re still employed in 2010), their personal lives are stalled.  Worse, the student loan default rates are increasing, and according to the Chronicle of Higher Education and Alan Collinge, the government gets 122¢ on the dollar for every default, but it pays out enough in collection fees that it nets only 50¢ on the dollar.  Taxpayers bear the costs of defaulted loans.

I can see why people didn’t want to bail out the banks in 2008, but the real wall-banger is how everyone wins from bankruptcy reform or a student debt bailout.  Specifically: whenever you bail out a defaulting debtor, you bail out the creditor as well, which is why the bank bailouts were premised on protecting “counterparty risk”.  With student debt, the federal government is the counterparty, so it’d be bailing itself out.  The debtors’ children would be happy to pay off the long term bonds if the alternative is being born into poverty or never being born at all.

They’d also benefit by living in a more equal society.

4 comments

  1. Hey I love your stuff, but erasing $900 billion from the books is wishful thinking, and a slap in the face to the people that managed their debts and worked full time to put themselves through night school. I completed 2 degrees with only $19,000 in stafford loans used for critical expenses. The rest was paid for by work.

    Where is my equality for not falling hard for college debt to begin with?

    1. Anon, I’m largely indifferent to dealing with student debt by either a bailout or bankruptcy reform, and from your comment I’m guessing you’d prefer the latter as bankruptcy filings would appear on debtors’ credit reports and impact their creditworthiness. The benefit of a bailout is it reduces the transaction costs of the court system processing all the bankruptcy filings, and the stimulus to the economy would strengthen it quicker, which means there’d be more growth sooner rather than later.

      Regardless of which option we take, no one benefits from zombie debtors walking among us.

  2. Nice, the term Zombie Debtors is getting more popular.

    But also we have to consider that if student loans become eligible for bankruptcy, the guaranteed federal loan program will have to be eliminated, leaving student loans to private lenders and the interest rates will be in the 10-12% range based on current market assumptions. The education industrial complex needs to be pared down, fewer kids need a degree. I am a proponent of certifications of excellence in certain areas that can be updated on 5 year schedules, increasing flexibility by demonstrating areas of focus during an adults life cycle and career path.

    1. Yup. I have no trouble eliminating the Title IV lending program. I think something like human capital contracts would work better than student debt, but if higher rates discourage borrowers, fine by me. If anything, I think the rates would probably be even higher than what you describe.

      As to paring down higher ed and focusing on certifications instead of degrees, couldn’t agree more. It would work really well in law, which has specialized in practice but not in education.

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