Counting up the Costs of College Debt

185694940Rohit Chopra, WG’09, personifies the call to public service that we often hear on Wharton’s campus—and which is institutionalized now by the one-year-old Penn Wharton Public Policy Initiative (PPI). Upon graduating with his Wharton MBA, Chopra joined the new regulatory outfit in Washington, D.C.: the Consumer Financial Protection Bureau. As if the storyline couldn’t come more full circle, Chopra returned to campus in late September for a lecture organized by the Penn Wharton PPI. His topic: student debt.

The event’s draw was the question often batted around in the mainstream and financial press. Is student debt going to be the next credit bubble to burst, leading to the next financial crisis? After all, at last count, approximately $1.2 trillion in student loan debt has accumulated in the United States.

“This is a low estimate,” Chopra told a room full of all-ears students, assuming that additional student borrowing comes by way of credit cards, family members and friends

Rohit Chopra, WG’09

Rohit Chopra, WG’09

Yet to cut to the chase, Chopra does not feel that we are in a student debt crisis. Unlike what happened with the collateralized debt instruments that nearly brought down the financial world in 2007 through 2009, student debt is not spread far and wide through financial institutions. The U.S. government holds most of it—meaning it does not represent very much counterparty risk. The federal government can collect its debts practically any time it so chooses—through wage and tax refund garnishments.

“You can only really escape these loans by death,” Chopra said.

Billions upon billions of dollars in student debt, however, could act as a drag on the economy in a “domino effect.” To illustrate, Chopra cited a survey by the National Association of Realtors, in which one of the top responses for why renters did not plan to buy a home was student debt. In other words, student debt has already affected a generation of consumers, causing them to defer the “milestones of the American dream,” as Chopra put it. Consumption is still the prime driver of the American economy, and that debt dampens consumption.

One solution to the student debt issue could be to simply lower tuition – more in line with the value proposition that a college degree now offers. The maxim, and usually the trumpeted evidence, suggests that people with college degrees make more, often far more, over a lifetime than people without college degrees. But Chopra’s data suggests that wages for college graduates actually fell 5.4 percent between 2000 and 2011. What makes college degrees so appealing is that high school graduates’ wages fell even more during that period—by 11.1 percent. (According to the National Center for Education Statistics, the median earnings for young adults with a bachelor’s degree was $45,000 in 2011, while the median was $30,000 for those with a high school diploma or its equivalent.)

In the current system, college students are faced with more debt and dropping wages. How can we help them?

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