Amer­ica’s ed­u­ca­tion bub­ble

Financial Mirror (Cyprus) - - FRONT PAGE -

One of the fun­da­men­tal pur­poses of gov­ern­ment is to ad­vance i mpor­tant pub­lic goods. But, if not han­dled care­fully, the pur­suit of sig­nif­i­cant so­cial goals can have un­for­tu­nate eco­nomic and fi­nan­cial con­se­quences, some­times even lead­ing to sys­temic dis­rup­tions that un­der­mine more than just the goals them­selves.

This hap­pened a decade ago in the United States, with the ef­fort to ex­pand home own­er­ship. It has been play­ing out more re­cently in China, fol­low­ing an ini­tia­tive to broaden stock-mar­ket par­tic­i­pa­tion. And it could hap­pen again in the US, this time as the re­sult of an at­tempt to im­prove ac­cess to fund­ing for higher ed­u­ca­tion.

In the first case, the US gov­ern­ment ea­gerly sup­ported ef­forts to make mort­gages more af­ford­able and ac­ces­si­ble, in­clud­ing the cre­ation of all sorts of “ex­otic” lend­ing ve­hi­cles. The ap­proach worked, but a lit­tle too well. The surge in debten­abled de­mand drove up real-es­tate prices, while banks’ greater will­ing­ness to lend led many peo­ple to pur­chase homes they couldn’t af­ford. The col­lapse of the sub­se­quent bub­ble – a ma­jor contributor to the 2008 global fi­nan­cial cri­sis – nearly tipped the world econ­omy into a multi-year de­pres­sion.

In China’s case, the gov­ern­ment hoped that broader stock-mar­ket par­tic­i­pa­tion – achieved through ef­forts to bol­ster eq­uity prices and pro­mote lend­ing for in­vest­ment – would make cit­i­zens more open to pro-mar­ket re­forms. Again, the ap­proach proved too ef­fec­tive, and a bub­ble formed. Now, the gov­ern­ment is try­ing to counter the risk of a dis­or­derly delever­ag­ing that would dam­age the Chi­nese econ­omy and pro­duce sig­nif­i­cant knock-on ef­fects for the rest of the world.

Amer­ica’s ef­fort to ex­pand ac­cess to stu­dent loans – a fun­da­men­tally good ini­tia­tive, aimed at en­abling more peo­ple to pur­sue higher ed­u­ca­tion – car­ries sim­i­lar risks. For­tu­nately, there is still time to do some­thing about it.

No one doubts that in­vest­ment in ed­u­ca­tion is vi­tal. Nu­mer­ous stud­ies have shown ma­jor re­turns for in­di­vid­u­als and so­ci­eties alike. Higher lev­els of ed­u­ca­tional at­tain­ment im­prove over­all eco­nomic well­be­ing and pros­per­ity, lower re­tire­ment bur­dens, and en­hance so­cial mo­bil­ity and sat­is­fac­tion. The un­em­ploy­ment rate for col­lege grad­u­ates in the US, at 2.5%, is roughly one-third the rate for those with­out a high so­cial di­ploma.

What pol­i­cy­mak­ers must de­ter­mine is how to in­vest in ed­u­ca­tion in ways that max­imise th­ese ben­e­fits, with­out cre­at­ing new risks. This is where the US risks fall­ing short.

Over the last ten years, the com­bi­na­tion of higher tu­ition fees, more stu­dent en­roll­ment, and greater re­liance on loans has caused the stock of out­stand­ing stu­dent debt nearly to triple. It now stands at well over $1.2 trln, more than 60% of which is held by the bot­tom quar­tile of house­holds (those with a net worth of less than $8,500).

To­day, seven out of ten post-sec­ondary stu­dents grad­u­ate with debt, with the to­tal vol­ume ex­ceed­ing debt from credit cards and auto loans com­bined. More­over, stu­dent loans con­sti­tute 45% of fed­er­ally owned fi­nan­cial as­sets.

Mak­ing mat­ters worse, the re­turn on in­vest­ment in ed­u­ca­tion is fall­ing, be­cause the econ­omy is grow­ing slowly and chang­ing rapidly, mak­ing it dif­fi­cult for some grad­u­ates to se­cure em­ploy­ment that takes ad­van­tage of their knowl­edge and skills. Uni­ver­si­ties are of­ten slow to adapt their cur­ric­ula to the econ­omy’s needs, while new tech­nolo­gies and busi­ness mod­els are ex­ac­er­bat­ing the win­ner-take-all phe­nom­e­non.

If the re­turn on in­vest­ment in ed­u­ca­tion con­tin­ues to de­cline, the ser­vic­ing of stu­dent loans will tend to crowd out other con­sump­tion and in­vest­ment out­lays, es­pe­cially given that stu­dent debt has con­sid­er­able se­nior­ity in the cap­i­tal struc­ture. In this sce­nario, the risks of de­fault and delin­quency would rise, along with fi­nan­cial in­se­cu­rity and gen­eral in­sta­bil­ity, all of which would ex­ac­er­bate the in­equal­ity tri­fecta (in­come, wealth, and op­por­tu­nity).

The good news is that, though some 10% of bor­row­ers al­ready face re­pay­ment prob­lems, the macroe­co­nomic and fi­nan­cial tip­ping points re­main some way off. But this is no ex­cuse for com­pla­cency; it merely pro­vides time for a con­certed ef­fort to im­ple­ment mea­sures that will ame­lio­rate the de­struc­tive trends stem­ming from stu­dent loans.

First and fore­most, US politi­cians need to take full re­spon­si­bil­ity for eco­nomic gov­er­nance, seek­ing not only to boost growth, but also to avert a re­duc­tion in long-term growth po­ten­tial. Af­ter de­pend­ing on un­con­ven­tional mon­e­tary pol­icy for far too long, the US Congress needs to adopt a more com­pre­hen­sive ap­proach, with mea­sures aimed at im­prov­ing worker train­ing and re­tool­ing, mod­ernising ed­u­ca­tion cur­ric­ula, and in­cor­po­rat­ing trans­for­ma­tional tech­nolo­gies more ef­fec­tively into the econ­omy. In­creased in­fra­struc­ture in­vest­ment, bet­ter cor­po­rate-tax poli­cies, and an up­dated bud­getary ap­proach are also needed.

For their part, uni­ver­si­ties – which have ben­e­fited con­sid­er­ably from the wide avail­abil­ity of stu­dent loans – should rein in their costs, while of­fer­ing more di­rect fi­nan­cial aid funded through phi­lan­thropy. Some uni­ver­si­ties have al­ready adopted “no loan” poli­cies; stu­dents’ demon­strated fi­nan­cial need is met en­tirely with grants fi­nanced by the univer­sity and other donors. Not all uni­ver­si­ties need to go this far – and most can’t, be­cause they lack large enough en­dow­ments to cover the costs. But a broader move in the di­rec­tion of non-debt fi­nanc­ing of higher ed­u­ca­tion is needed.

Ef­forts could also be made to en­cour­age house­holds to save more, start­ing ear­lier, for ed­u­ca­tion. Stu­dent loan dis­clo­sures should be made more trans­par­ent, thereby en­abling ap­pli­cants to make re­spon­si­ble de­ci­sions, with lower-cost two-year com­mu­nity col­leges serv­ing as a use­ful step­ping stone to a tra­di­tional col­lege ed­u­ca­tion. And more could be done to ex­pand in­come-based re­pay­ment schemes.

None of th­ese mea­sures will be easy. But if im­ple­men­ta­tion con­tin­ues to lag be­hind re­al­i­ties on the ground, the chal­lenges will be far greater down the road. As bor­row­ers’ grow­ing debt bur­dens limit their fi­nan­cial flex­i­bil­ity and pro­duc­tive con­tri­bu­tion to the econ­omy, the pol­icy em­pha­sis will shift from mit­i­gat­ing fu­ture risks to re­duc­ing in­debt­ed­ness di­rectly through loan for­give­ness and bailouts. That would raise thorny is­sues of fair­ness and mis­aligned in­cen­tives, and could ul­ti­mately have the per­verse ef­fect of re­duc­ing ed­u­ca­tional ac­cess.

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