Second only to home mortgages, student loans are one of the two largest consumer debt categories in the U.S. As of 2021, student loan debt totaled nearly $1.75 trillion, a growth of more than 80% over the last decade. So naturally, much of the media attention is on the demographics of debt holders, as women are more likely than men to carry student loan debt — even more so with Black (31%) and Hispanic (19%) women.
While certainly cause for concern, the focus is somewhat misplaced. The decisions, policies, and other factors that led to this massive problem deserve greater scrutiny, as we’re effectively trading present-day profits for the prosperity of future generations — calling into question how student debt affects the economy.
Consider the interest rates charged for student loans. Federal Stafford loan interest rates for undergrads increased from 3.73% to 4.99% this past summer. Interest rates for grad students also saw a hike, rising from 5.28% to 6.54%. Students interested in a federal PLUS loan aren’t exempt, either. They can now expect an interest rate of 7.54%, rather than the 6.28% in previous years. As a country, it’s almost as if we treat education as an interest-bearing commodity instead of what it truly is — an investment in vital skills for the benefit of our national interests and the ability to compete globally.
Not an accident in the making
Beyond interest rates, we can trace a large part of the growing student loan debt problem back to the definitions of education and skills development. They now appear to mean two different things. In the past, education consisted of learning skills and preparing for a career that would allow an individual to reach their endless potential and compete in the national or global marketplace. Education today often means that students spend several years at a college or university and walk away with a degree (if they stay and graduate).
Complicating matters further are policies, many of which allow none of the parties involved to have any real “skin in the game.” All you need is to look at the lending process to see what I mean. During a typical loan transaction outside of education, the lender will usually assess the repayment risk and the ability of the borrower to repay. However, the lender faces almost no chance of default because borrowers can’t discharge student loans with bankruptcy. Therefore, it doesn’t matter to lenders if the market or career prospects within a given major are low. They will get their money back — and then some — no matter if the borrower ends up in their chosen career.
Perhaps both public and private lenders should make these types of analyses available to borrowers. Likewise, schools should do more in the area of providing practical information on study majors, career prospects, and market projections to students and families. But why should they? Few (if any) incentives are tied to the success of graduates outside the institution’s grounds. The schools get paid regardless of which field of study is selected. No one is focusing on the best interest of the student.
Because students and families didn’t have the information necessary to make sound decisions regarding education, many opted for college when a different path had the potential of netting a better outcome. Others selected a college that lacked the right resources, faculty or training. Then, there were those that chose a major that did not give them the skills to compete nationally or globally. Collectively, these factors contribute to the massive and continually rising student loan debt crisis.
Requiring a collective fix
With so many parties involved in the crisis, it will take a collective effort to correct course — first and foremost being policymakers. Those at the national, state, and local levels need to establish policies clearly outlining how education is an investment in the nation’s future and its ability to compete worldwide. And they need to include multiple strategies detailing the skills and capabilities that the U.S. needs in the upcoming years to modernize and maintain our infrastructure and innovate in key and emerging industries.
Better yet, allocate education investment funding in these critical areas and make the money available to all public colleges and universities. Maybe allot additional public funds to institutions when their graduates can find employment in their major within six months of graduation. Then, if graduates maintain employment at 12, 18, or 24 months after graduation, offer additional funds or incentives to the school. That will certainly up their skin in the game and all but guarantee better experiences. I am aware of one school in Texas successfully experimenting with this model.
Colleges and universities will also play a direct role in the collective fix. For one, these institutions must do a much better job aligning with the education needs of students and families. They also need to reestablish the link between education and skills development. For example, some schools are developing and expanding relationships with employers to co-create more practical curricula so that students graduate with hands-on experience and skills needed in the workforce. Guide students into majors that coincide with their talents, their interests, and our nation’s strategic needs.
Lenders, too, should take on more responsibility. If retaining the student loan approach to paying for college, lenders must help students minimize the risks associated with loans. They can do this by providing analysis, reports, and recommendations on schools, majors, skills, careers, expected salaries, lifetime earnings, and so on. This information will give students the best chance to make good decisions and increase the probability of ensuring success in life.
Beyond these parties, students and families must become more informed. As student debt became front and center during the pandemic, so too did the need for virtual learning; universities and institutions are now embracing technology into their curriculum as a result. However, a four-year degree may not be the best path to success for everyone. Community college, trade skills, and apprenticeships are all valuable and viable options — and are, in fact, very respectable in this day and age. There’s also an emerging trend that some call “new collar” jobs, where people gain tech skills without incurring the massive debt associated with a four-year degree. The options include coding boot camps and online cloud computing/development certifications on platforms such as AWS, Azure, Google, Salesforce, and others.
How we go about correcting course
The public sector must change its approach to education. Currently, the federal government sets education policies and provides loans without a coherent national strategy. Multiple government agencies publish reports on necessary skills in STEM, trades, infrastructure, and national security that the U.S. will need in the coming years and decades. However, policies and incentives rarely align with the data.
The public sector can begin by redefining education as an investment portfolio to achieve national interest objectives. The following can help move the nation in the right direction:
- Establish and focus your strategic vision on the skills necessary to compete globally over the next five, 10, and 20 years.
- Develop an education portfolio strategy in partnership with the private sector, detailing the key industries and skills needed.
- Enter partnerships with colleges, universities, community colleges and trade schools that meet the necessary skills development requirements to receive strategic funding. Also, distribute this information to high schools and other organizations that work with students and families.
- Identify non-degree certification paths like AWS, that focus on critical skills acquisition and demonstrate the ability to solve complex problems and architect outcome-driven solutions.
- Set a federal policy to fund only the skills and education aligned with the strategic vision. While anyone is free to study and major in anything outside the national strategy, it won’t be tuition-free and must be funded out-of-pocket or via private loans.
- Reassess the national education strategy every two to three years to ensure we’re developing the right skills and keeping pace with the rapid technological changes.
The student loan debt crisis won’t be fixed overnight. However, we must do something if we ever hope to get graduates out from under the weight of the money still owed — or yet to be owed. It will take a collective effort, but we can solve the problem and prepare the next generations for the American 21st century.
