College Loans and Moral Hazard

This week the Huffington Post launched its “College” section which will feature “…voices from colleges and universities all around the country and offers a real-time snapshot of what’s going on in the lives of the nation’s 19 million college students — from coverage of the latest trends and sports happenings to more serious issues such as freedom of expression on campus and the rising cost of tuition,” writes Arianna Huffington.

One section is focuses on “Majoring in Debt” and provides stories from college students about their experiences with student loan debt.

As of Tuesday, some of these stories had below them a link to a blog entry by Education Secretary Arne Duncan—“Move Our Money From Banks to Students”—which promotes the student loan bill. “The House has passed the Student Aid and Fiscal Responsibility Act,” writes Duncan. “This legislation will end bank subsidies and invest in students directly. The Senate is still working on its bill.”

“The president’s student aid reform plan will save tens of billions over the next decade,” writes Duncan.

I’ve previously mentioned how the student loan bill raises significant questions about moral hazard in the form of student loan defaults.

The Project on Student Debt concluded last year (pdf) that seniors graduating from college in 2008 “carried an average of $23,200 in student loan debt.” But the debt outlined in these guest columns, filed under the category “Majoring in Debt,” is often much higher.

“Where’s our bailout?” asks Todd Sussman, a law student at the University of Miami who says he has accumulated approximately $180,000 in debt in his process of gaining a Bachelor’s, Master’s and now law degree. “I knew I would have to pay the money back eventually, but I thought about the earning potential I would have as a lawyer and didn’t think I would have any problems paying those loans back,” writes Sussman.

Here are some excerpts from other students and graduates:

“In the end I’ll owe approximately $60,000 in Federal and private loans. I think the worst thing that could happen now would be regretting that I spent that much money. But, I don’t. I think it was worth it.” – Travis Walters, “No Regrets Spending the Money.”

“I hold a BS (International Relations, 2001) from the University of Wisconsin as well as a Master’s (Public Administration, 2005) from Columbia University. My parents paid for most of my undergraduate costs, but I still managed to take out close to $80,000 in student loans for my undergraduate and graduate education. … Even after my one-year graduate program, I incurred $75,000 in new student loan debt. I consolidated my loans, and believed that some soon-to-be-had job would allow for a relatively modest payoff time. … My total debt stands at $91,897 — still way more than I make in a year. …” – Dan Olson, “College Debt: A State of ‘Indentured Servitude.’”

“I am currently a third year medical student and already $226,000 in debt because I’m out-of-state and have no other means of funding my education except through loans. I’ll graduate with at least $295,000 in debt, an amount that will only increase as interest accumulates during residency training and over my 20-year repayment period.” – Ifreke Williams, “$295,000 in Medical School Debt.”

“My [graduate] school was generous enough to offer me a scholarship which covers roughly half of my tuition for my two years. Despite that, I’m still $44k in debt at the end of my first year. … When it is all said and done I will be about $85k in debt.” – Liz Olson, “$44,000 In Debt and Counting.”

“‘I’ve been gainfully employed now since July 2003 and have faithfully paid my loans down from a high of $70K down to the current level of $50K. But, having chosen a life of public service following graduation, first with the Federal government and now with a non-profit, it has been a challenge to pay off these loans and maintain a fair standard of living.” – Bubba Cook, “Veterans Benefits Just Don’t Cut It.”

“I’m am the proud owner of about $90,000 worth of student loan debt. I paid Allied Interstate $200 a month last year toward one of my 13 non-consolidatable loans until they took a monthly payment out twice and over-drafted my bank account. They still call a few times a day but, at this point I tell them to come get me, cause if I’ve got a choice between groceries and some tool getting an extra vacation day for the commission of my loan payment, well, I’ll take the groceries. …” – Kamala Nicole, “$90,000 In Debt.”

“The current value of my childhood home is probably less than amount of money I have borrowed in student loans.” – Sarah Tobin, “College Debt: $100,000 Deep (Video)”

As the late Christopher T. Warden explained at the National Press Club last summer, increased federal loan subsidies increase the availability of loans, thereby “driv[ing] up tuition” and “creating the need for more loans.”

AIA’s published a short 102-page free-market text by Warden entitled Voodoo Anyone? How to Understand Economics Without Really Trying, available in print and for Kindle download.

Author M. Stanton Evans will discuss Voodoo Anyone? at our upcoming Author’s Night this Thursday, Feb. 25, from 6 – 8 p.m. at Armand’s Capitol Pizza. RSVP on Facebook or contact Sarah Schaerr Norton.

Bethany Stotts is a staff writer at Accuracy in Academia.