College student debt is a massive problem. In 2016, 44.2 million Americans owe a total of 1.3 trillion in student loan debt (average 37K per person). The average monthly student loan payment is $351, and the delinquency rate is around 11%. These statistics confirm what a challenging problem student loan debt is for many Americans.
This raises the two questions: What is causing this problem and what can we do to solve this problem. Let’s start by addressing the primary cause of this problem. The #1 factor behind the student debt problem is that the total cost of attending college has skyrocketed over the past 30 years. The figures below compares the total cost to attend college in 1971 and 2016 on an inflation adjusted basis.
Total Cost of Private 4 Year College:
1971 – $17,318
2016 – $45,365
Percent Increase – 161%
Total Cost of Public 4 Year College:
1971 – $8,307
2016 – $20,092
Percent Increase – 140%
Given these staggering figures, we also know that a lot more people are attending college in 2016 than in 1971. From an economics point of view, if more people are attending college in 2016, shouldn’t economies of scale and modern technology efficiencies result in cheaper costs? Why in the world has college tuition more than doubled?
The simple answer to this question is that the college education market has no incentive to lower prices because it is not competitive or efficient. People feel like they need a college education to compete in a global economy, so they are willing to go to college whatever the cost. In a real market, if college prices become too expensive, not enough students would enroll and the college would have to lower prices to attract more students. At the same time, well intentioned federal student loan programs are providing a blank check for students to borrow money to help pay for college. The supply of free money in the form of student loans combined with an inelastic demand curve for education results in rising college prices and massive amounts of student debt. This broader point is supported by this New York Times article.
So what’s the solution to this problem? It is obvious that something must be done because the status quo is not acceptable. Democrats have proposed making college tuition completely free. While this sounds good on paper, the sheer cost and lack of market competition is somewhat concerning. Colleges would still have little incentive to compete for students based on price or to look for operating efficiencies to drive costs down. Free college might also further distort the mismatch between the supply and demand in the labor market because students would bear less opportunity cost when picking their major.
One proposal is to make college completely free for specific high-demand fields as determined by the labor department. In 2016, this applies to STEM related fields such as engineering, computer science, nursing etc. – but these will undoubtedly change in the future. As the labor market needs shift, the free college tuition will concurrently steer college students towards the relevant academic fields. Ultimately, this provides a win-win-win for college graduates, employers, and the US economy – Employers get the skilled labor they need, college graduates get good high paying jobs after graduation, and the US economy grows as a result.