Economics professor shares thoughts on student debt

Last updated: 05/26/14 9:12am


According to the Federal Reserve Bank of St. Louis, the U.S. has accrued $1.2 trillion in student loan debt. While Eastern Michigan University has no way of determining exactly how much its current and former students owe, EMU’s students received $247,716,323 in aid from the university in the form of grants, scholarships, loans, stipends, tuition waivers and work-study programs.

Most colleges across the U.S. have similar financial circumstances, rising tuition and lots of financial aid to pay for it. However, the way America does its academic business is not set in stone; changes are happening and some of them are quite radical.

Tennessee is considering a proposal to provide education at community colleges for free. The $34 million program will be funded by the state lottery and will include the thirteen community colleges and 27 vocational schools in the state that give out degrees.

Gov. Bill Haslam, R-Tenn, who proposed the idea in his State of the State address last February, reasoned that the students of today understand that the price of tuition is not the actual cost to attend college. He says by making tuition free, more people will pay attention and be more likely to attend, which will benefit Tennessee’s economy in the long run.

In Michigan, legislators are looking into alternative student financing, including a pay-it-forward program. The program would provide students with an interest-free loan. Once graduated, the student would then deduct a portion of their income out of their paycheck to pay the state back over 25 years.

Carol Hogan, a professor of economics at EMU, agreed to sit down for an interview about student loan debt.

Q: According to the Federal Reserve Bank of St. Louis, the amount of college debt has gone from half a trillion dollars in 2007 to over a trillion now. Why did it increase so fast in such a short time span?

A: Part of it is the overall enrollment numbers over that time. It went up. Part of that is because of the bad economy, people go back to school when the economy is bad..

Q: The US has $1.2 trillion in student loan debt, according to the Federal Reserve. What is the single biggest factor in the rise in college costs?

A: College costs are rising three times faster than the consumer price index, and that’s a hard answer to get. I’ve asked different universities to answer that question and I have gotten some very vague answers. If you look at the average consumer price index rate of inflation over the last year it would be in the high ones, 1.6/1.7 somewhere in there. At four year public universities it’s gone up three times faster than that, but I have yet to get what I think is a reasonable answer to that.

Q: What is the biggest factor?

A: That’s a mystery to me because I would think that the increases there would mirror increases in the overall economy, and yet three times faster is pretty significant.

Q: How justifiable is the current cost of going to college?

A: As long as the reward for a college degree is as large as it is currently, it’s going to justify the cost. The wage differentials are so obvious for someone with a bachelor’s degree or higher. As long as that pay differential is maintained, there’s a payback for it.

Q: At what point will the high cost of college make it not worth it to get a college degree? Are we nearing that point?

A: I don’t think we’re nearing that point. If anything, we’ve seen that the higher the level of education the better off the student is. In terms of earnings, lower unemployment rates, shorter lay off periods, quality of life and health. All those measures are in favor of encouraging a college degree. I don’t see that changing soon.

Q: Tennessee is considering a law to give free tuition for community college, do you think this would seriously affect the rate of student debt in the Michigan if the same law were enacted here?

A: As long as the student perceives that a two year education at a community college has the same value as those first two years in a public university, then yes, it would have a huge impact. And theoretically there should be the same rate of education. That’s probably a very reasonable place to start because some careers are going to be well suited with an associate’s degree.

Q: The cost of attending college has gone up 130 percent since 1988. At what point does this simply become unsustainable?

A: I think that if the wage differential shortens up [between those with a college degree and those without] then I think we’re going to have a dramatic turn. I don’t see that happening in the next five to ten years though.

Q: And once it does – what kind of effect would that really have on the economy? Would it be like the housing bubble of 2007?

A: I don’t think it would be as extreme as that. We didn’t just have a housing bubble, we had fraudulent behavior in financial services that was more powerful than even a housing bubble. It would be a drag on the economy, there’d be no question. There would be an immediate drag because of the employment that’s generated from universities if the enrolment slowed down. But there’d be a long-term drag if the level of education was stunted somehow, and again I’d be very surprised if that happened in the next decade.

Published May 26, 2014 in News

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