In March the Consumer Financial Protection Bureau reported that total outstanding student debt has now surpassed $1 trillion. The rationale behind the debt is the same as that has driven sovereign debt to crisis proportions: higher education leads to higher lifetime earnings, which in turn will fuel economic growth.
There would be merit to the argument if securing education loans were no different from seeking funding for a new venture. Prospective students would have to prepare a “business plan” that describes their vision, details their strategy to achieve it, and includes pro forma financial statements that explain how the money will be used and forecasts a reasonable return on the investment.
Most important, the plan would have to convince potential investors that prospective students have what it takes to see the plan through and that they are willing to commit their own personal resources to their success.
No such rules exist for government subsidized student loans, however. The only criteria are a relaxed demonstration of need and acceptance into a qualifying school. Yet current estimates suggest that only 43% of those entering college in America will graduate within six years.
Granting student loans does a great disservice to those with low prospects of completing their course of study. Their debt cannot be discharged even though their ability to repay has been significantly reduced.
Even those who do graduate cannot guarantee an acceptable return on investment. The ease of borrowing encourages far more debt than is necessary, and a college degree is no longer an assurance of a career that justifies the investment.
In fact, as can be seen in this chart, labor force participation has been steadily falling for more than a decade in every group except those without a high school diploma: