“If some­body plays by the rules, they shouldn’t be pun­ished for it.” — Pres­i­dent Obama

The Pres­i­dent made this inar­guable state­ment in the course of pro­claim­ing a change in the law gov­ern­ing stu­dent loans.  Hence­forth, mil­lions of peo­ple who bor­rowed for col­lege will have their month­ly pay­ments restruc­tured and, in some cas­es, be entire­ly relieved of the oblig­a­tion to repay their debt.

In the President’s mind, bor­row­ing mon­ey is play­ing by the rules; pay­ing it back is punishment.

To his cred­it, the Pres­i­dent rec­og­nizes that there is a con­nec­tion between stu­dent loan debt and ris­ing tuition.  He just can’t seem to put his fin­ger on why col­leges keep charg­ing more for a prod­uct that offers dimin­ish­ing returns.  He is cer­tain that tem­per­a­tures rise due to human activ­i­ty.  Tuitions, on the oth­er hand, lev­i­tate by some force of nature beyond human con­trol.  Government’s only recourse is to encour­age peo­ple to bor­row more than they can afford to repay, then restruc­ture or for­give their debt.

But what if tuitions are ris­ing in part because the ready avail­abil­i­ty of cred­it enables uni­ver­si­ties to gouge con­sumers with exces­sive prices?  Some col­lege degrees are worth the cost, equip­ping peo­ple for earn­ings suf­fi­cient to repay loans with­out finan­cial dis­tress.  Oth­ers, not so much.

A recent study by Beth Akers of the Amer­i­can Enter­prise Insti­tute pro­vides evi­dence that repay­ing stu­dent loans has become more bur­den­some for mil­lions, not because stu­dents have bor­rowed so much, but because they earn so lit­tle — in spite of their diplomas.

Using data from the Fed­er­al Reserve’s Sur­vey of Con­sumer Finances, Akers found that:

There is not a strong pos­i­tive rela­tion­ship between stu­dent debt and finan­cial hard­ship … In fact, the high­est rates of late bill pay­ment, an indi­ca­tion of finan­cial hard­ship, are observed among house­holds with out­stand­ing debts less than $5,000.

The fact that peo­ple who incur large stu­dent loan debts aren’t at a pro­por­tion­ate­ly high­er risk of falling behind on pay­ments may seem coun­ter­in­tu­itive, but it actu­al­ly makes a good deal of sense.  Peo­ple with degrees in med­i­cine, for exam­ple, often take on sub­stan­tial debt, as do under­grad­u­ates of the most pres­ti­gious uni­ver­si­ties.  Physi­cians and Stan­ford alum­ni gen­er­al­ly earn enough to stay cur­rent on their stu­dent loan pay­ments, though their debt is often quite high.  Peo­ple with degrees in stu­dio arts from a pub­lic insti­tu­tion may fall behind despite car­ry­ing less debt.

“Over­bor­row­ing,” Akers writes, “occurs when stu­dents bor­row more than they can expect their degree to return in future wages.”

The Pres­i­dent would nev­er use a term like “over­bor­row­ing,” but it is pre­cise­ly the prob­lem that the stu­dent loan cri­sis presents: mil­lions have bor­rowed more than their degree is worth.

Akers out­lines some sen­si­ble solu­tions to pro­tect con­sumers from falling too deeply into debt.  Loans are gen­er­al­ly pred­i­cat­ed on two fac­tors: col­lat­er­al and cred­it­wor­thi­ness.  Stu­dent loans, for the most part, take nei­ther into account.  Like cred­it card debt, there is no col­lat­er­al, noth­ing that lenders can recov­er in the event of default.  Nor is there an eval­u­a­tion of an individual’s capac­i­ty to repay.  There is mere­ly the assump­tion – in many cas­es with­out basis and often false – that a col­lege degree will result in future earn­ings that will enable a bor­row­er to repay the loan with­out hardship.

Instead of bas­ing loan amounts on such vague and faulty assump­tions, Akers argues for mak­ing “loan eli­gi­bil­i­ty deter­mi­na­tions on an indi­vid­ual basis, tak­ing into con­sid­er­a­tion all of the cir­cum­stances faced by the indi­vid­ual, as well as the out­look for future abil­i­ty to pay.” Such deter­mi­na­tions might con­sid­er, among oth­er things, the insti­tu­tion a stu­dent attends, what he or she is study­ing, and what grades he or she is making.

Bas­ing stu­dent loan eli­gi­bil­i­ty on indi­vid­ual bor­row­er char­ac­ter­is­tics would, of course, reduce the amount a stu­dent could bor­row to study at cer­tain insti­tu­tions and to pur­sue cer­tain majors.  That, in turn, would force uni­ver­si­ties to reduce tuitions or at least to vary them by course of study, some­thing that the high­er edu­ca­tion estab­lish­ment would find threatening.

Threat­en­ing, but fair­er to stu­dents and their fam­i­lies.  The val­ue of uni­ver­si­ty diplo­mas dif­fers dra­mat­i­cal­ly by major.  That dif­fer­ence is quan­tifi­able.  Antho­ny Carnevale of George­town Uni­ver­si­ty has found that peo­ple with under­grad­u­ate degrees in engi­neer­ing have medi­an earn­ings of $80,000 — $120,000, fig­ures that are 2–3 times that of those who pur­sued such cours­es of study as visu­al and per­form­ing arts, dra­ma and the­ater arts, social work, and coun­sel­ing psychology.

This is in no way to dis­par­age such majors.  The prob­lem is not that a stu­dent might choose to pur­sue a degree in com­mu­ni­ca­tions dis­or­ders sci­ences, but that a uni­ver­si­ty charges such stu­dents and their fam­i­lies out­landish tuitions for such a degree, know­ing that gov­ern­ment loans will help pay the inflat­ed price.

The dirty lit­tle secret of the stu­dent loan pro­gram is that, as cur­rent­ly struc­tured, it facil­i­tates bad behav­ior by uni­ver­si­ties.  They hike tuitions to max­i­mize their rev­enue from gov­ern­ment-backed stu­dent loans, then con­fer degrees that offer lit­tle eco­nom­ic val­ue to many of their grad­u­ates. Mil­lions of those alum­ni strug­gle to pay back mon­ey they bor­rowed for a diplo­ma that was­n’t worth the price.  The uni­ver­si­ties’ pri­vate gain is at the root of this pub­lic problem.

The Pres­i­dent, unfor­tu­nate­ly, has cho­sen to reward this rent-seek­ing behav­ior by the high­er edu­ca­tion lob­by, call­ing for even more debt and more debt for­give­ness, deep­en­ing a cri­sis that gov­ern­ment and uni­ver­si­ties have been com­plic­it in cre­at­ing.  He should call on Con­gress to reform the stu­dent loan pro­gram, not by expand­ing loan for­give­ness and arti­fi­cial­ly sup­press­ing inter­est rates, but by pro­tect­ing stu­dents against bor­row­ing too much.  Akers’ sug­ges­tion of indi­vid­ual under­writ­ing, though not with­out flaws, would be a sen­si­ble point of departure.

His plan to increase new stu­dent bor­row­ing and to restruc­ture and for­give more exist­ing debt is con­sis­tent with his Administration’s pecu­liar def­i­n­i­tion of suc­cess.  The rise in loan for­give­ness (defaults) — like the rise in the num­ber of peo­ple who col­lect food stamps, sign up for Med­ic­aid, restruc­ture their under­wa­ter mort­gages, and col­lect ben­e­fits while remain­ing job­less for extend­ed peri­ods of time — might be under­stood as indices of eco­nom­ic fail­ure with deep­en­ing cul­tur­al roots. The Pres­i­dent regards them as pol­i­cy achievements.

There are con­sid­er­able costs for such achieve­ments, costs that will be borne by the shrink­ing per­cent­age of house­holds that pay fed­er­al tax­es.  These are the peo­ple who, as the Pres­i­dent might say, “play by the rules.”  He is pun­ish­ing them for it.