Plan would worsen college-debt crisis

Posted: October 02, 2012

By Steve Welch

President Obama is correct to be concerned about the student-loan crisis. Last year, the total amount of student debt exceeded $1 trillion, while unemployment of recent college graduates has stayed stubbornly high. This enormous debt could diminish the standard of living of our nation's youth for decades.

But, as so often true with this president, he correctly identifies a problem and then looks for government-centric solutions instead of free-market ones. Worse, he looks for a politically appealing solution that sounds great in Twitter but, once examined in detail, actually makes the original problem worse. His latest soundbite solution to student debt is the "Pay as You Earn" plan. This program would cap the amount that students repay their loans at 10 percent of their income. After either 10 or, at most, 20 years, anything not paid back is forgiven. In other words, taxpayers would pay off the loan.

This ill-conceived policy will actually drive up college costs and incentivize people to get degrees that are not in demand in the 21st-century global economy.

Student-loan costs are soaring because college costs are soaring. Over the last two decades, the cost of a college degree has tripled, which is 2½ times the rate of inflation. While technology is driving down the cost of most industries, it's not happening at universities. "Pay as You Earn" will only worsen this trend.

Why would any student care what the cost of college is if his actual payment has little to do with the eventual cost? Might as well spend $180,000 for a four-year degree, rather than get a comparable education at $70,000. Either way, the loan payment is going to be 10 percent of one's annual income.

To drive down tuition rates, we need more students to focus on the actual short- and long-term costs of college.

One of the unspoken problems with our economy is the skills gap. We have too few people prepared for the jobs of the 21st century.

The overall unemployment of recent college graduates is 8.9 percent. But that rate varies depending on one's degree. The unemployment rate for art history majors is a whopping 12.6 percent, with more than half working at jobs, often low-paying ones, that have nothing to do with their degree. On the other hand, recent electrical engineers have an unemployment rate of 7.1 percent, and an average starting salary of $57,000. This is good, because they will be forced to pay off the loans of the kids who received degrees in philosophy.

Obama's policy will continue to push people toward degrees that are not in demand. As an engineer, I am the first to say that the training is hard. Often, would-be engineers and others working toward hard-science degrees have to work night and day and struggle to graduate. But it's worth it. The market is telling us that hard-science degrees are needed. Even the president speaks about the importance of science, technology, engineering, and math, but he pushes policies that diminish the likelihood that students will pursue these much-needed degrees.

To improve secondary education and accessibility, the focus must be on reducing costs and improving results. We should subsidize students, not schools, and let students shop for the best value. Why give more tax dollars to universities that often spend it without regard to how students benefit?

We should also encourage policies that use technology-enabled open courseware, which allow universities to share their course material freely with the world via the Internet. Such a policy would ensure that the American university system continues to be accessible, while at the same time the envy of the world.

Obama needs to stop pandering, and instead work to ensure that our schools help make the 21st century another American century.


Steve Welch, the founder of DreamIt Ventures and KinderTown, was a Republican candidate for U.S. Senate last spring.

The thoughts expressed in this piece are those of Steve Welch and not DreamIt Ventures.

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