The Student Debt Crisis:

What It Is, And How to Solve It

Jacob Waldman

Introduction
Todays America is the most educated America we have seen to date. With nearly 2 million bachelor
degrees awarded each year, it is now a societal expectation to attend university. Education, though,
comes at a steep price in modern times, with record breaking tuition rates and student loans being taken
out without hesitation. America now faces an unexpected obstacle as student debt piles up and price tags
keep getting marked up. With a crisis on their hands, lawmakers are trying to keep up with the publics
demand for affordable education but cannot pin down what approach is best. As with many situations,
sometimes the simplest approach proves the most elegant and effective; it just takes the right situational
chemistry to deploy it.
 What is Wrong with the
Current Situation?
The student debt crisis is real, and the numbers
can prove it. The American populous owes a
cumulative $1.4 trillion in student loan debt in
2016i, which is spread out over 44 million
borrowers. This is approximately $620 million
more than the American credit card debt, and
about 7% the size of the national debt. ii

The average debt per borrower is about $32

thousand, and this number is not only worrisome
but deceiving. iii For a graduate in 2016 the
average debt was $37,172, which is $5,000 more
than the mean and a 6% increase from 2015
graduates (35,000still above the mean).iv Also,
a 350% increase in student loan numbers was
observed in one decade: 2005-2015. v
An interesting attribute of the current situation
is who the debt problem pertains to. One would
think that students with high debt are the ones
in financial crisis, and they may be for an amount
of time, but the fact of the matter is that the
students with lower debt are in crisis. High debt
borrowers usually graduate undergraduate
programs and go on to pursue a graduate,
doctoral or professional degree. Law, Medical,
MBA, MS, and PhD students all acquire higher
debt but also make better pay, so they can better
manage their loan payments. It is the students
who drop out after a few years and walk away
without a degree that experience issues. Due to
low pay, limited job opportunities, and
unemployment, they must struggle to avoid a
default on their loan.vi
The number of university dropouts is a crisis on
its own. Whether due to academics or cost, only
266 four-year private, non-profit schools (26% of
total) will have over 2/3 of incoming full-time
freshmen graduate in the next six years.vii
Tuition over time. Source: US World and News Report**
Overall, only 55% of freshmen at all private non-
profit institutions will graduate.viii
That said, though mid-high debt borrowers can
graduate with a degree, and continue their next
step, they can still face monumental issues.
Of the 1,870,000 bachelor degrees awarded in
the 2013-2014 school year, 358,000 were in a
business field, 200,000 in health professions,
173,000 in social sciences and history, 117,000 in
psychology, 105,000 in biological and biomedical
sciences, and 99,000 in education.ix These are
the largest categories per the National Center for
Education Statistics. They highlight a particular
issue: of the 1 million listed, almost 30% of them
are in Social Sciences and Liberal Arts, degrees
with high unemployment and low pay due to low
demand; these fields are already saturated with
competent employees. The prospect of
unemployment can be averted by pursuing a
doctoral degree yet, compared to the 117,000
psychology bachelor degrees awarded, only
6,600 doctoral degrees were awarded the same
yearx. There is a significant disparity in the
employability and pay of those students, and
hence the ability for them to handle the burden
of student loans.

And for all these ex-students: dropouts,

graduates, MBAs, scientists, and artists alike,
what does this debt mean to them? For the next
10, 20 or sometimes 30 years, these students
must pay a minimum on their loan every month.
Many loans, including federal loans, are never
forgiven - even in the case the borrower declares Source: women employed.org***
bankruptcy.
in unscrupulous ways that may target certain
Large outstanding debt makes it difficult to get a groups and end up giving borrowers an unfair
mortgage for a house, or other loans of any kind, disadvantage in the deal. This definition
and the monthly bills make it harder to save up encompasses a wide array of practices ranging
for down payments. Also, many borrowers are from reverse redlining balloon mortgages, but
putting off starting families, and the birth rate the most common practices by far in the student
for women from 20-29 is at a loan industry are subprime
record low according to the We are lending money we lending, risk-based pricing,
Centers for Disease Control dont have to kids who and inadequate or false
(CDC). Also, the need to pay cant pay it back to train disclosure.xii
off loans incentivizes them for jobs that no
searching for higher paying longer exist. -Mike Rowe, Subprime lending and risk-
jobs, and this results in a TV Host, Writer, Producer based pricing go hand in hand.
subtle yet impactful social Subprime lending is the act of
consequence. A higher salary lending to borrowers amounts
allows for faster loan repayment; however, it that they are likely to not be able to afford and
also creates vacancies in fields like K-12 in turn have higher chances of defaulting.xiii Risk-
education, which offer less pay but are critical for based pricing is the setting of very high interest
society, as those talented to fulfil them now seek rates to high-risk customers (customers with
jobs elsewhere. xi poor credit scores or low incomes) people
already likely to default on loans even more
Explaining the Crisis likely, and is often used in conjunction with
subprime lending.xiv The moral issue with this
practice is that these loan companies are taking
Predatorial Finance and a
potential customers that are too high-risk for
Game Of Loans their and/or other companies policies, and
purposefully offering them loans that yield an
To solve this problem, one must identify the even higher risk borrower. Then, the loaners add
factors that contribute to its complexity. strict default terms on the loan agreement so
that in the case of a default, the borrower is at
Many borrowers end up in unfair situations due
an unfair disadvantage to the predatory
to predatory lending. Predatory lending is the
company.
act of loan agencies lending money to borrowers
Inadequate or false disclosure is when a loan back to $4-5. The citizens then push for more
company hides, misrepresents, or does not subsidy, the government raises it to $3, the shop
report the true costs, risks, or appropriateness of raises their price to $7-8, then the government
a loans terms, or the company quietly changes raises, and on and on until the price is out the
the loan terms after the initial offer.xv What this roof on ice cream cups.
means for the borrower is they will likely not be
Now turn those subsidies into loans. Every $2
fully informed of the terms of a loan before
must be paid back to the government over time
accepting it. This can lead to a multitude of now
plus interest, well say 5 cents per dollar. Now
unfair actions to be pressed on the borrower:
the ice cream doesnt cost $3 to the customer
hidden fees, fluctuating interest rates, unknown
anymore, it will instead cost $5.10 as the loan
default terms in the case of a default, etc. When
must be repaid with interest, but the perceived
combined with risk-based pricing and subprime
cost of the ice cream in the moment of purchase
lending, borrowers can be put at a huge
will still be $3 since that is what is being paid out-
disadvantage upon graduation--a time when
of-pocket. The same cycle will occur as with the
they should have opportunity to start a life on
subsidies until ice cream cups cost $10 with $4
their own.
loans costing the customer a total of $10.20 in
The Consumer Financial Protection Bureau is the long run, more than double the original
addressing some of the problems with predatory price.
finance, but these actions are merely the
Instead of cups of ice cream and parlors we have
offspring of what Turning Point USAs founder
education and universities, instead of ice cream
and executive director Charlie Kirk calls the
enthusiasts we have aspiring students, instead of
Game of Loans. * The Game of Loans is the
just loans we have all forms of federal student
name Kirk gives to the caustic cycle of
aid including loans and grants. When the federal
government subsidies that cause tuition to rise.
government raises student aid, the perceived
After all, if college wasnt so expensive, there
price of university is cheaper, so more students
wouldnt be a student debt crisis. xvi
enroll. The university will then increase tuition
Before going in-depth, lets simplify this with an since they are practically getting free money
example to help intuitively understand what is from the government and students can
occurring at the most basic level. immediately afford a slightly higher tuition. After
a while, the tuition-aid gap gets too large, aid
Say that a cup of ice cream at a certain parlor
increases, and the cycle starts again.
costs $5. Citizens of the community believe this
price is steep and thus support political actions This cycle is far more complicated than a basic
to subsidize these cups of ice cream so everyone economics problem. One must now consider the
can get a cup whenever they want. The miscellaneous conditions of the system.
government then decides to start handing out $2
The first condition to address are politicians. Not
subsidies for ice cream cups. Now the cup will
just any politicians, but the subset of career
only cost the customer $3 since $2 are being paid
politicians who aim to get re-elected since
for by the government. There is a large influx of
politicking is their primary job. These politicians
customers at the parlor because of the subsidy,
usually support increasing federal aid to ease the
and the business is prospering. Then, the parlor
burden of student debt, and in turn get votes
figures it can charge $6 or $7 dollars per cup,
from the youth who perceive they will benefit
making the subsidy act as a free buck or two in
from that policy. Instead of focusing on the long
profit, and returning the cost to the customer
term economic effects of increasing aid, the
politicians will act in the present to keep their
jobs.
Second is the effect of financial interest. Many
federal student loans charge interest, and
interest is a form of revenue for the government.
Therefore, no incentive exists to prevent the
government from increasing aid budgets when
they are prompted to as doing so is an
investment of sorts.
Third is that universities win from all of this too.
The raise in tuition provides the university with
more capital to spend on renovations,
expansion, hiring, sports, or savings. The
university has no incentive to stop raising prices,
and has no incentive to spend optimally as it will
have a seemingly endless river of money flowing
in semester after semester.
And fourth is the strain which grant budget
expansion leads to. When the federal
government increases specifically student grant-
based aid, it contributes to the cycle in the same
way the loaning money to the student does, but
instead of charging the individual borrower the
bill, it charges the public. Increasing this form of
aid will either must result in an increase in the
national debt, an issue on its own, or an increase
in taxes, which Americans have shown adversity
to throughout history.
Essentially, federal student aid earns politicians
votes, increases government revenue, and
provides universities with practically free money
to do what they wish, but at the price of the
student/borrowers financial freedom. As loan
amounts increase, tuition price increases, and,
since the student must pay off the loans with
interest, the overall price of a degree increases.
Yet since this cost is a long term burden, not an
immediate one, attending college now requires
a minimal amount of up-front money; no one
must save and plan finances to attend anymore,
instead they simply take out a loan. After their
federal aid dries up, students turn to private
agencies that may or may not put their
borrowers at a disadvantage with the art of
predatory finance. Interest rates pile up the
money, and students end up being taken to
court, like in Stefanie Grays case.
Stefanie Gray defaulted on her $36,000 loan
after she unexpectedly was unemployed
following college and couldnt pay the minimum
monthly payment her company, Sallie Mae,
requested.xvii In two years, due to interest, her
loan debt increased from $36,000 to $77,000
and she found herself being sued for her right to
her wages, tax refunds, and bank account.xviii Due
to complex legal issues, Stefanie got out of it,
more due to luck and a good lawyer than
anything else. If attaining her degree wasnt so
expensive, Stefanie wouldnt have had to deal
with this situation in the first place.
Proposed Solutions
What is on the Table and What is
happening Right Now?
Currently there exist many proposed solutions to
the student loan crisis. Why arent we using
them? Are the ones being used effective?
We previously discussed why increasing federal
student aid hurts the situation, but what about
free public college?
The notion of a tuition free public university
system has been tossed around a lot in the past
few years, especially with the recent presidential
election in 2016. Both Bernie Sanders and Hillary
Clinton openly supported free bachelor degree
education, but what effect would this have?
Would it relieve the student debt crisis? The
answer is yes, for future generations, but it has a
high potential to create other problems in its
wake.
Tuition is 20% of public universities revenue and attempting to stabilize or decrease their tuition
xix
40% of private universities. This money is used by addressing unnecessary costs from sports.
to pay for instruction, research, hospital The University of Idaho is dropping top tier
services, support services, daily operations and sports, and the state of Virginia has put a cap on
maintenance, university scholarships, housing, how many tuition dollars it can spend on athletic
culinary services, etc. Public universities are programs.xxiii
already 24% funded by state
In fact, cutting sports cost is
governments (not including
Students should not be asked taking shape as a new way to
grants and contracts), and to
to pay more on the debt than control tuition. Many state
make tuition free that number
they can afford. And the debt schools are considering taking
needs to increase to 44%.xx To
should not be an albatross the step the University of
achieve that, taxes must around their necks for the rest Idaho took, at least until the
increase, government funding of their lives. -Donald Trump, NCAA lowers its fees.
must be reshuffled, or the President of the United States,
national debt must increase. businessman That said, President Trump
has his own plans. Trump
Free college also takes
plans to solve this crisis through a federal fix that
responsibility out of the student and their
will, instead of providing more aid, ease the
familys hands. Germany is often held as the
burden of debt. All private and public loans will
pinnacle of free tuition education, the role
roll into an income based repayment plan that
model system. Not only is tuition free, but the
will cap monthly payments at 12.5% of the
degree programs are designed for 3 years
borrowers earnings, with the unpaid balance
instead of the standard 4 in America. Yet only
forgiven after 15 years. Also, students would be
31% of German students graduate.xxi Why?
able to refinance federal loans at lower rates,
Because the students and their families have no
able to reduce the interest rates and simplify the
skin in the game. With no direct personal or
system.xxiv Though this will relieve a lot of
family funds invested in the education, the
economic strain on the borrowers, it will shift the
student is more likely to drop out due to stress,
economic pressure to the lenders, since it
grades, or boredom than if they held a stake in
automatically makes every loan higher risk due
the game. Ironically, it is the familys and
to the 15 year time constraint. In combination
students tax money that is at stake since that is
with the income based monthly payments, this
what will fund the education system.
reform has the potential to help predatory
Aside from federal funding and graduation lenders by giving them reason to increase
issues, Rick Staisloff, founder of the higher interest rates, especially for degrees that yield
education consulting group rpkGROUP, believes lower incomes.
free tuition would also hinder the quality of
With all of this, it still does not address the issue
education by encouraging inefficiency. Staisloff
of the high tuition prices in the first place.
writes: If you make tuition free, it completely
eliminates the incentive to look at the cost side of
the equation. Higher education has not shown a
willingness on its own to change the model [of
recursive price increases].xxii

That said, some universities like the University of

Idaho and the University of Virginia are
 A More Optimal Solution
To weed a garden, one must pull the weeds by
the root. It is the most complete way to solve a
weed issue, as the weed will have no chance of
growing back. This is the approach we, as a
nation, need to take when tackling the student
debt crisis. Our current solutions are either
trimmers or poison: they are either temporary or
cause their own set of issues.
To uproot this debt crisis, tuition inflation must
be reversed. To deflate tuition, the demand for
an undergraduate degree must decrease or the
supply of degrees must increase.
The key here is not to over-deflate tuition.
Tuition should be deflated enough to make
degrees more affordable without losing any
quality of education: make the universities
optimize their spending.
The process is rather simple, but daring:
decrease federal student aid; not all at once, but
slowly over an extended period, likely years.
By decreasing federally sourced student aid, the
perceived cost of a degree increases to aspiring
students and less students will choose to attend
college, especially for low income degrees like
those in the social sciences, arts, and humanities.
The fact that the number of students attending
college will decrease should not create any
worry, as the number will be slight since the
decrease in aid will be gradual, and the change in
perceived cost will be minute. Keep in mind that
this discrepancy between initial perceived cost
and final perceived cost will only remain for a
small amount of time until the universities adjust
their tuition cost to make up for at least part of
the gap. Then federal aid will decrease again and
the mini-cycle will repeat.
Every time the university adjusts their prices, the
perceived cost of aid will decrease and the
number of students attending college will
balance out. Again, the goal is to optimize
university spending, but how does this happen?
Staisloff and his team have found on average at
institutions with 50, 100, 150 or more programs,
50% or more of undergraduate students
participate in 20 or fewer of the provided
programs. xxvCutting and optimizing program
spending, facility use, utilizing new information
systems and technology, and switching over to
competency-based education models are all
ways Staisloff states that universities can
optimize their spending to decrease tuition rates
without losing quality of education. In fact, he
says that many of the optimizations mentioned
will increase the quality of education.xxvi
As tuitions and aids decrease, and universities
optimize spending to account for the supply-
demand gap, there will be a point where the
universities are sufficiently optimized and the
price of a degree will begin to stabilize from
university to university as further cuts to tuition
will decrease education quality. This is the point
where the process of cutting federal aid will stop,
and future aid will be adjusted on a yearly to
semi yearly basis for inflation, as the universities
will likely do to tuition, to keep the tuition vs. aid
ratio steady.
Also, remember the adjustments in student aid
are small and steady adjustments. This prevents
a supply shock within the university, which will
not only be horrible for the economy, but also
for the publics support for the policy.
Additionally, by making the adjustments small,
the university optimizations will occur in small
steps as well. Overall, this plan will minimize
strain on the universitys, students and families,
and the governments budget while achieving
the goal of relieving the student debt crisis, all
for the cost of a little time and patience.
This plan will be accompanied with some side
effects, but not necessarily negative ones. For
one, as the perceived price of a bachelor degree
increases, it is proper to expect a slight increase
in trade school enrollment as a slight decrease in
university enrollment is observed. While some
may not be pleased with this, it is a huge
economic opportunity. The opportunity here is
to fill the skills gap, a chasm of numbers that
lies between those who know what to do and
dont know what to do: the people who know
how to do. In other words, there are three types
of education: the uneducated, the educated and
the skilled. Modern university education teaches
students how to solve problems, what needs to
be done, and the principles that define the
problems; not how to do the work that needs
to be done.xxvii Trade and technical schools offer
an education of the skills required to fulfill the
needs of engineering, maintenance, and
information systems projects. The gap part is
that there exist 5.6 million open, well-paying
jobs in the US that require a trade school
education.xxviii This process is not only going to
ease student debt, but also ease stress on the
economy for these scarce jobs in the process.
The Keys to Success
Issues of Feasibility
As with all proposed solutions to the student
debt crisis, and any proposed solution in general,
the plan must be feasible. The positive outcome
must outweigh the negative, and the hindrances
of the plan must be minimal. As discussed, the
outcomes are strongly positive; now to discuss
hindrances.
First off, private loan agencies. A decrease in
federal aid will result in a possible increase in
demand for private loans. Private loans may
increase in price, but due to the stigma around
private student loans and the increased price the
private loans should not be enough to curb the
efforts of the plan to decrease tuition. That said,
it will act as some friction and negate a portion
of the policys effectiveness.
Secondly, general support of the plan must be
cultivated. This must be done through two
groups, in whatever order possible: politicians
and the politically involved public.
Politicians may be opposed to this plan or
hesitant to accept it since many get youth votes
for re-election through the Game of Loans. The
key would be convincing a handful of active
politicians of the merit of this plan who then
would advocate it as a part of their running
platforms. This would in turn educate the public
and slowly gain public support, hence both
conditions will be fulfilled and the policy will be
closer to being enacted.
Likewise, if the public is first educated, the
politicians will follow. If a few writers for media
outlets are convinced of the plans merit and
gain their communitys support of it, the idea
behind the policy will spread and soon politicians
will jump on board to get voters to support
them.
Last is the issue that defines the stability of the
whole plan: the rate at which federal aid is
decreased. What rate is large enough to make an
impact without spurring negative consequences
on the universities, students and the public?
Before being enacted, this rate must be carefully
determined, but I imagine a rate that would
model a logistic decay in federal student aid
would be best: start slowly to ease the system
into the adjustment process. Next, speed up
gradually until a maximum decrease is reached
at the estimated halfway point where
optimization of university expenditures is in full
flight. Finally, gradually slow down to level out at
the desired aid amount and therefore tuition
price.
An Example of Logistic Decay
 Conclusion
With rising tuition rates and over $1.4 trillion in student loan debt, the student loan crisis must be
addressed.xxix Current proposed plans are ridden with undesirable side effects, and current attempts are
only proving successful at curbing the growth of the problem. To utterly terminate this crisis, a powerful,
potent, deep-penetrating policy is needed, something that will pull the issue out at its roots: tuition
inflation. This plan to decrease federal aid will set off a chain reaction of economic effects in a controlled
manner so that all the desired consequences are achieved and damage and inefficiency are minimalized.
This policy plan is the most optimal solution to the student debt crisis, and should be the primary focus
when contemplating policy decisions.

Bibliography
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***"Featured Infographic - Student Loan Debt." Women Employed. N.p., n.d. Web. 16 Apr. 2017.

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