Follow the trail: taxpayers, through the Federal Direct Loan program, lend money to higher education students, who then turn it over to colleges, who pay their professors and staff.  Upon graduation, students repay the taxpayers. Through the multiple years involved in this process, the only category stressed by the financial schematic is that of students. Conceptually, it is as if taxpayers gave the money to college/professors/staff, providing more than decent livelihoods to the majority of those involved, but then requested the lowest paid sector, newly graduated students, to pay them back.

Maybe this would be okay if the Pell Grant and the above low-interest federal loans covered the cost of college, as they did at the outset, and the early years, of the underlying legislation. Maybe it would be okay if there was a proportional approach of debt repayment to income.

However, in the past 25 years, the cost of college has increased at a rate more than double that of inflation. As a result, it takes a much bigger percentage of income for parents to send their child off to seek a diploma, which, to worsen the picture, only has a 50-60% chance of actually happening.

This escalation of costs does not, as it would in private industry, connote anything with respect to a bottom line. Graduation rates have not been enhanced. The only visible effects from the disproportionate increases in tuition, room and board, and required fees are: more college presidents earning over a million dollars, a sharp increase in administrative staffing, escalation in salaries of professors, and new dormitories which are marketed like fancy apartments but financially have the added attraction, to the school, of being required purchases at a fixed price for students who either choose or must dorm.

Behind this cost growth has been the willingness of the aforementioned taxpayers and other lenders (about 15% is from private creditors) to fund the system. This has produced ever increasing debt levels for students, who, upon graduation, cannot afford their debt repayments for a period of time.

(If STEM majors were up, one might argue that more expensive professors are required; however, STEM majors are down. And, contrary to private enterprise, there is no connection of college costs to something called “supply and demand.”)

And at no time has there been any real pressure on colleges to cut their costs. In fact, they brag when announcing tuition increases that are only slightly above inflation. Like a three card monte scam on the sidewalk, this irritating arrogance shifts attention away from steeper increases in both room and board and a laundry list of mandatory fees.

In the past (not sure what that timeframe might be; it would precede the Great Recession of 2006-08), the progression of at least four-year graduates to full participants in the real economy took place in a fairly predictable fashion. Now, high debt levels prevent this. Besides the rising preference of many young people for rental situations because of multiple non-economic factors, the ultimate non-historical economic outcome is now a sharp growth in rentals of homes, not apartments.

Adding insult to the injury being inflicted on student borrowers is that five years ago, Federal Reserve Chairman Ben Bernanke encouraged investment firms to buy up houses, and Fannie Mae, which is government controlled, is guaranteeing the debt of the private company that is doing the purchasing (WSJ: 1-25-17). “Fannie Mae’s involvement signals a belief that home ownership will remain out of the reach for many Americans.   As an additional layer of angst, the record on evictions of basically anonymous Wall Street homeowners reportedly is more negative than that of small landlords who, in many cases, have eyeball relationships with their tenants.

So taxpayer money has been transferred to colleges and to Wall Street, courtesy of a debt repayment system which is stacked against the very individuals supposedly being helped by the former to create economically viable lives.

Seems like a big mismatch.

It could be rectified by the federal government (a) basing their indirect funding of colleges (particularly loan monies) on some algorithm that includes graduation rates (initial attempts in this direction have been met with heavy resistance by, guess who, the leaders of colleges), inflation, and average earnings after graduation, and, simultaneously, (b) redesigning the student debt repayment schedule along the lines already in place in various countries. [Note that states are already moving in the direction of (a).]

For example, in Australia, repayments do not begin until the student borrower is earning over $40,000 (American equivalent). Then, the repayment is 4-8% of income, accomplished through a conventional withholding approach. The policy assumption is that 20% or so of total debt will never be collected, for one of three reasons: (1) the student’s earnings never reach the threshold amount, (2) the student passes away before full repayment, or (3) the student leaves the country and his earnings are not subject to the Australian withholding process.

Student debt defaults/delinquencies under the current American system are on pace to exceed the Australian assumption, without two of the three reasons being relevant. Subpar earnings are obviously a factor behind financial problems for student debtors in the United States, even though there is no legislated connection of income to repayment, except on a delayed, long-term basis under one of the multiple, complicated federal repayment programs.

Numerous organizations in the United States have put together their own proposals for revisions in the student debt repayment situation. Perhaps now, with economists and politicians scratching for incremental growth in GNP, there is an opportunity for reworking a system which has become a drag on productive economic activity.

Calculating the offsets of homebuilding/rental activity to any incremental slowness in debt repayment beyond the existing high rate is beyond my pay grade. Somehow, though, a transfer of money from newcomers to the labor market to those who have assisted in the higher education process, i.e., taxpayers, and those who are profiting from the financial mismatch, e.g., Wall Street firms, seems contradictory to the oft-expressed desire for greater, more balanced expansion of incomes.